The Free Market: The Greatest Amount of Good for the Most People

From Harvard economics professor Greg Mankiw:

"Yesterday, I chartered a sailboat so my family and I could spend a couple of hours out on the waters off Nantucket. The captain of the boat met us at the town pier, loaded us onto a small skiff, and then took us to a mooring out in the harbor, where the boat was waiting.

He explained to us that he would prefer to keep his sailboat at the pier, which would make loading and unloading passengers much easier, but he could not get a space there. Every year, he told us, the town has a lottery to allocate the right to rent one of the scare docking slots. For quite a few years, the captain has been putting his name into the lottery, but he has never won. "There are just not enough spaces," he said.

Ever the economist, I replied, "It seems to me that the price isn't high enough."

"Well, actually," the captain said, "if you want to pay more, you can go down there." He pointed to the next dock over.

Apparently, next to the town pier is another pier that is privately owned and operated. The price for a docking space there is about five times as high as it is at the town pier. But there is never any significant shortage. Anyone can sign up for a slot, as long as you are willing and able to pay.

What a wonderful illustration of basic economic principles! In one way or another, scarce resources need to be allocated among competing uses. Free markets typically use the price system. Governments, often in the name of "fairness," seem to prefer other mechanisms, which don't always direct resources to their highest value use.

The sailboat ride was a bit of a bust, by the way. The day was warm and sunny, and the captain was a delightful storyteller, but the wind was not nearly sufficient for a good sail. Sadly, there are some shortages even the price system is not able to correct.

Question for Ec 10 students: If the town raised the rental price of a docking slot at the town pier, what would happen to the price at the private pier?"