Some items won't sell if price goes up

SYLVIA PORTER

December 31, 1990|By Sylvia Porter | Sylvia Porter,Los Angeles Times Syndicate

The United States is in the middle of an elasticity crisis.

This does not mean that nationally our socks are sliding down our ankles. Instead, it describes an economic situation so simple that almost no one understands it.

Elasticity, or "price elasticity of demand" as it is taught in first-year economics courses, means this: some goods and services continue to sell just as well, even when the price goes up. And the sales of some goods and services drop quickly when the price goes up only a little.

That's a very powerful idea, when carefully used. You should understand it because it can help you determine when policymakers know what they're talking about. (It's also useful when setting the prices for goods and services that you may offer.)

A joke that used to be told among college professors observes there must be an "economics gland" somewhere in the human body, and those who seek public office almost always have it removed.

The country's experience with elasticity in recent months suggests that the joke may be true. (It could be that the confusion comes in the term "elasticity" itself, because it seems to work just as well backward: those items most sensitive to price changes are said to be elastic, while those that continue to sell no matter what the price are described as inelastic.)

A famous recent political-economic scandal took place in New Jersey and involved the price elasticity of demand as applied to heavy trucks. The state government, facing a heavy deficit and noting that New Jersey had a thriving heavy truck sales industry, placed a substantial tax on such sales. It would bring in many millions of dollars, the lawmakers reasoned.

They did not take into consideration the extreme elasticity -- price sensitivity -- of the demand for trucks. The new tax raised virtually no money. Instead, the state's truck dealers stopped selling trucks. A strong industry became a weak one, the state made no money, and citizens grew angry. (The tax was repealed, but only after truck dealers had lost a year's sales, plus whatever residual sales will be lost as customers established relations with dealers in other states.)

A similar situation may be developing nationally through the new federal tax law. One of its provisions is a surtax on so-called luxury items -- expensive cars, boats, airplanes and the like. It is no doubt very politically popular to tax "luxuries," for they are the province of an ill-defined group called "the rich." Beyond that, though, the idea doesn't make much sense.

Consider, for instance, the 10 percent additional tax on boats costing more than $100,000. The boating industry has already fallen on hard times. Last summer in some regions there were as many as 25 percent fewer boats in the water. This doesn't mean only that sales were down but that those who already owned boats were not launching them for the season. The point had been reached where costs were too high. The prices of used boats were falling.

Adding 10 percent will work, then, if the goal is to discourage people from buying boats. As a revenue raiser, though, it is probably doomed to failure. Indeed, the law was written, at least in part, to discourage sales.

The National Marine Manufacturers Association (NMMA) estimates that the resulting loss of business will cost the industry 8,000 jobs, not counting the reduction in maintenance and marina business. This means that 8,000 taxpayers will, for the short term at least, become former taxpayers. The NMMA says that this loss of revenue will more than offset any increase in revenue brought about by the new tax.

All because boats are elastic. The demand for them is sensitive to price change.

What sort of things, then, are inelastic? What products continue to sell even when the price goes up?

The two leaders in this field, the economists and market analysts tell us, are cigarettes and liquor. Relatively great increases in price have had small effects on sales.

If the purpose is to raise revenues, that's where you impose the taxes.

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