Pricing an Unknown Product
by Adam Juda on Wednesday, November 5, 2014
Yesterday was election day in America. I cast my votes in federal, state and local races, but frankly, no issue caused me more headaches than a ballot initiative in Palm Beach County (home of Boca Raton). It wasn't because I felt extremely passionate about the issue, but because it dealt with my favorite topic: pricing.
Here's the basic outline of the measure. See if you can find the potential problem:
The town will allocate $X over the next several years to acquire, restore, improve, and manage conservation lands.
In general I think conservation is a good thing, so everyone assumed I would vote for it. There was just one problem: the price.
But Adam, Palm Beach has specified the price of $X! You know the price.
True, but I didn't know the product. Conservation is a very generic term that can mean very different things. Would the money be spent buying up large swathes of undesirable land at high prices? Or would it be used to remove pollution from former industrial sites?
I was conflicted. I like going to parks, but I had no idea how the money would be spent. In a sense, I was being asked to select a price without being told what the good was. The state of Alaska was purchased for just over seven million dollars in the 1860s. Even adjusted for inflation (~ 120 million in current dollars), it was a veritable bargain. I doubt there is any politician in the country who would argue to the contrary.
But how do we know that it was such a great deal? The answer is that we have two critical pieces of information:
- An understanding of the price (the dollars allocated)
- An understanding of the product (the space, natural resources and political interests)
Without an understanding of both parts, one cannot possibly determine the wisdom of a decision. Had the Alaskan purchase been the same $7 million, but the acreage been not 586,412 square miles but a single mile, we would still be lambasting the decision to spend money to increase the public lands.
So when I saw the initiative that gave me a price, with no specifics as to the product with which it was associated I was at a loss. The product being sold was no longer the conservation of land so much as my faith in the shrewdness and economic wisdom of politicians.
- Would politicians behave ethically and in the best interest of their constituents?
- Would politicians be able to identify and maximize the value of each dollar spent for land?
- Would the money be best spent on conservation over other possible items such as infrastructure, schools or public safety?
There were just so many unknowns that it was difficult to make a rational choice one way or the other. The vote could not be based upon fact so much as emotion.
So how did I vote? Well, that's between me and the state. Nevertheless, the ballot initiative passed, so I look forward to seeing how effectively this money is spent.
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