The law of one price, demonstrated


Bravo! This is brilliant, it's bloody beautiful. I don't think I've ever seen a more hit-you-right-between-the-eyes dataset in my life. If you are teaching economics 101 (or for that matter, econometrics 101) this is the definitive demonstration.

Here, ladies and gentlemen, for your education and amusement, lie the benefits of the market plain and simple, to see with your own eyes and believe. There shall be no doubt in your minds. Watch closely, for ye shall see how functioning markets are no less powerful than magic.

Here's the story. In Kerala, a state in south India, fishing is very important. There are more than 1 million fishermen, and fish is consumed by 70% of the population on a daily basis. The catch varies daily between the different fishing regions, and so does the price: the poor folk can never tell if they'll be able to afford fish on any given day, as it is lady luck who decides. Waste and shortages are common, as sometimes the fish caught are simply too many, or too few.

But in 1997, a miracle happens. Mobile phones are introduced, and one of the key ingredients of functioning markets - information - is in place. What follows is, as promised, nothing short of magic.

Three different regions, three different mobile telephony adoption dates. On the y axis is the price, on the x axis time. Fish now make their way to where they are valued more, and prices are stable. Fishermen profits increase by 8%, and the average price falls by 4%. Before, six fish in every hundred were wasted, with fishermen unable to find someone to sell them to. Now, all fish find their way to a happy customer.

Here is the Robert Jensen paper (free access), and here is a presentation. Hat tip to the Yorkshire Ranter, via the ASI blog.

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