Wednesday, March 28, 2012

Justice Scalia gets the law of supply and demand wrong at oral argument

And Matthew Yglesias thinks Scalia's error could actually make the case that the Affordable Care Act is constitutional.


posted by John Althouse Cohen on Wednesday, March 28, 2012
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3 comments:

Grobstein said...

I don't think Scalia really got this wrong in the way MY is suggesting. If most manufactured goods exhibit declining marginal costs, then over the long run increasing demand leads to decline in price. This dynamic is extremely common in the real world, and extremely salient in daily life. To use Yglesias's example, hybrid cars probably have gotten cheaper because more people want them, unleashing economies of scale in manufacturing.

That said, the mechanism here is not really related to the mechanism at work in insurance markets, so it's a bad analogy even if "correct" in both cases.

March 28, 2012
John Althouse Cohen said...

To use Yglesias's example, hybrid cars probably have gotten cheaper because more people want them, unleashing economies of scale in manufacturing.

The economies of scale point is valid, but doesn't greater demand generally lead to higher prices under the law of supply and demand? Economies of scale were mentioned several times in oral argument (by some of the justices and at least one of the lawyers), but no one mentioned Yglesias's point. The problem isn't that it's impossible for what Scalia is describing to happen some of the time; the problem is that the lawyers and judges have a selective understanding of economics.

March 28, 2012
Grobstein said...

Greater demand leads to higher prices under certain circumstances. The law of supply and demand describes the behavior of markets when particular conditions obtain.

Over the long run, manufactured commodity goods are not described by that dynamic, because when prices increase suppliers enter the market or add capacity, reducing profits to zero. Whether price goes up or down overall depends on the magnitude of economies of scale compared to increase in factor prices. But as a rough and ready generalization I think what Scalia said is much closer to right than the opposite.

I haven't listened to the argument, but from what I can tell no one mentioned Yglesias's point because it's not relevant. In fact, it's doubly irrelevant, first because the analogy that it responds to (raised by Scalia) is not actually relevant, and second because it is not a correct response to Scalia's analogy.

March 28, 2012

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