We've all had this aggravating experience: rushing
through the grocery store to finish our shopping, hurriedly looking for
the shortest line, congratulating ourselves as we get in a line with
only one lady in front of us, and then wanting to scream when we see her
pull a big batch of grocery coupons out of her handbag. Surely this is
an egregious example of waste - of our time and of the store's and
manufacturers' resources in handling all this paper. Surely government
should come to the rescue and promote efficiency by simply outlawing
grocery coupons. Wouldn't such an obviously beneficial action by
government create wealth?
Such apparently appealing proposals are the reason why
we need principles to guide our thinking. Without some general starting
point for reasoning through specific issues, we can be easily taken in
by the superficial allure of seemingly obvious solutions.
What is the best guide for economic issues? It is the
following simple statement: the invisible hand works. Whenever someone
proposes government action to solve a problem, the best immediate
reaction is to ask why market forces can't provide a better solution.
Given the overwhelming evidence of the vast superiority of the invisible
hand versus the visible hand in dealing with economic problems, the
burden of proof should be heavy on the advocate of government action.
Let's apply our principle to the grocery coupon. A
freely functioning invisible-hand process has yielded grocery coupons,
and they are likely to continue for the indefinite future. Every
entrepreneur, institution, and procedure in the market process is
continually subject to the survivor principle: market success depends on
producing value greater than the opportunity cost of resources used. In
other words, those who survive and prosper necessarily make, on net, a
positive contribution to economic wealth-the invisible hand works. Thus,
grocery coupons are necessarily wealth-creating.
Clarifying the Obscure
For most economic activity, the validity of this
argument is clear. No one doubts that the butcher, the baker, and the
candlestick-maker create wealth. The same goes for people who produce
cars, movies, and computers. On the other hand, the wealth created by
coupons is obscure enough to escape most of us unless we think carefully
about the subject.
How does issuing grocery coupons create wealth? Coupons
allow sellers to engage in price discrimination-to sell the same product
to different people at different prices. Consider a bottle of Heinz
ketchup. The marginal cost of producing one additional bottle may be
only 50 cents; but given the demand, the profit-maximizing price may be
$1.50. At that price only people who prefer Heinz and who are not
particularly price-sensitive will buy Heinz. Others will buy the house
brand for perhaps $ 1. 00.
Heinz could sell much more ketchup if it lowered its
price to $1.20. But it would lose more from lowering the price to those
who would have bought at the higher price than it would gain from the
additional customers attracted by the price reduction. Thus Heinz seems
stuck serving only its dedicated customers, and those who are more price
sensitive seem stuck with the house brand.
Coupons resolve this dilemma. If Heinz issues a
30-cent-per-bottle coupon, price sensitive individuals will be most
likely to go to the trouble (bear the opportunity cost) of searching out
the coupons. They will then be able to buy Heinz at a price of $1.20
while others are paying $1.50. Note that Heinz is better off (makes more
profit), the price sensitive customers are better off (they voluntarily
searched out the coupons, revealing that they valued Heinz at $1.20 more
than the sacrificed time and effort), and devoted Heinz customers are
unaffected, buying ketchup at the same price as before. Thus grocery
coupons are, on net, wealth-creating.
Checkout Delayed
But haven't we forgotten something here? What about the
delays in the checkout lines? Aren't the delays an externality imposed
on the rest of us? Of course the coupon users and the companies benefit.
Otherwise coupons would have disappeared long ago. But isn't the cost
imposed on everyone else ignored in the transaction, resulting in market
failure?
The short answer is no. Obviously there is a delay cost
imposed on patrons who use no coupons, but the storeowner has every
incentive to consider that cost. After all, customers can go elsewhere.
The storeowner may respond to this problem by opening additional lines.
The appearance of delay may not reflect reality once the adjustment in
the number of lines is taken into consideration. So there may actually
be no costs imposed on those who don't use coupons.
But suppose no additional lines are opened or people at
least think they're being delayed by coupon users. Anyone is free to
open a store that refuses to accept coupons. Couponless customers could
then rush to this store, and seemingly everyone would be happy.
Unfortunately, it's not that simple. That stores generally accept
coupons indicates that coupons are profitable. They enable stores to
broaden their customer base while being compensated by the manufacturer
for the handling expenses. A store that refuses coupons would have to
charge higher prices to make up for the loss of manufacturers' payments
or of coupon-sensitive customers. As usual, there's no such thing as a
free lunch - if you want to save time by quicker checkout thanks to
either more lines or nonacceptance of coupons, you will have to bear the
associated cost. The scarcity of stores that refuse coupons reflects the
general entrepreneurial judgment that most customers would not be
willing to pay enough extra to make such stores profitable.
Thus grocery coupons increase the wealth of the
companies that issue them, the consumers who use them, and the stores
that handle them, while imposing no cost on nonusers that they could not
avoid if they were willing to bear the associated burden. The invisible
hand sometimes works in mysterious ways, but it does work.
At the time of the original publication, Bill Field
was a professor of economics at Nicholls State University in
Thibodaux, Louisiana.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
March 2000, Vol. 50, No. 3.
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