Alchian–Allen effect

The Alchian–Allen effect was described in 1964 by Armen Alchian and William R Allen in the book University Economics (now called Exchange and Production[1]). It states that when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is because the added per-unit amount decreases the relative price of the higher-grade product.

Suppose, for example, that high-grade coffee beans are $3/pound and low-grade beans $1.50/pound; in this example, high-grade beans cost twice as much as low-grade beans. If a per-pound international shipping cost of $1 is added, the effective prices are now $4 and $2.50: High-grade beans now cost only 1.6 times as much as low-grade beans. This reduced ratio of difference will induce distant coffee-buyers to now choose a higher ratio of high-to-low grade beans than local coffee-buyers.

Another example is that the effect would predict that Australians drink higher-quality Californian wine than Californians, and vice versa, because it is only worth the transportation costs for the most expensive wine.[2]

The effect has been studied as it applies to illegal drugs and it has been shown that the potency of marijuana increased in response to higher enforcement budgets,[3] and there was a similar effect for alcohol in the U.S. during Prohibition.[4] This effect is called iron law of prohibition.

Colloquially, the Alchian–Allen theorem is also known as the “shipping the good apples out” theorem (Thomas Borcherding),[5] or as the “third law of demand.”[6]

See also

References

  1. ^ Alchian, Armen Albert (1983). Exchange & production: competition, coordination & control. Belmont, CA: Wadsworth Pub. Co. ISBN 0-534-01320-1.
  2. ^ "Dear Economist - Financial Times". 24 November 2006.
  3. ^ Thornton, Mark (1998). "The Potency of Illegal Drugs". Journal of Drug Issues. 28 (3): 725–740. doi:10.1177/002204269802800309. ISSN 0022-0426.
  4. ^ Thornton, Mark (1991). The Economics of Prohibition (PDF). Salt Lake City, UT: University of Utah Press.
  5. ^ Borcherding, Thomas E.; Silberberg, Eugene (1978). "Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered". Journal of Political Economy. 86 (1): 131–138. doi:10.1086/260651. JSTOR 1828763.
  6. ^ Razzolini, Laura; Shughart, William F. II; Tollison, Robert D. (2003). "On the Third Law of Demand". Economic Inquiry. 41 (2): 292–298. doi:10.1093/ei/cbg008.

Further reading

  • Ekelund, Robert B. (1992). "The Union Blockade and Demoralization of the South: Relative Prices in the Confederacy". Social Science Quarterly. 73 (4): 890–902.
Stub icon

This article related to microeconomics is a stub. You can help Wikipedia by adding missing information.

Content Disclaimer

Informasi ini disarikan dari Wikipedia dan disajikan kembali untuk tujuan edukasi. Konten tersedia di bawah lisensi CC BY-SA 3.0. Kami tidak bertanggung jawab atas ketidakakuratan data yang bersumber dari kontribusi publik tersebut.

  1. The information displayed on this website is sourced in part or in whole from Wikipedia and has been adapted for the purpose of restating it. We strive to provide accurate and relevant information, however:
  2. There is no guarantee of absolute accuracy. Wikipedia is an open, collaborative project that can be edited by anyone, so information is subject to change.
  3. It is not intended to constitute professional advice. The content displayed is for informational and educational purposes only. For important decisions (e.g., medical, legal, or financial), please consult a professional.
  4. Content copyright. Wikipedia is licensed under the Creative Commons Attribution-ShareAlike License (CC BY-SA). This means that content may be reused with appropriate attribution and shared under a similar license.
  5. Responsible use. Any risk arising from the use of information from this website is entirely the responsibility of the user.