How prices affect economic flexibility

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How prices affect economic flexibility

My recent trip to Boston was a great chance to see firsthand the transportation infrastructure in the United States. The train to Boston stopped about 10 kilometers (6.2 miles) before the destination. I thought the train was the safest way to travel in a record-breaking snowstorm, but even the train track was affected.

Passengers were stuck in the train for three hours, but surprisingly, no one was complaining. The train fare was $132, and I found it a bit too expensive for the service. The trains had an interesting pricing system. For the same journey, the ticket fares were different depending on the day and time of day. And a different fare was available depending on whether one was traveling in the morning or afternoon, or on weekdays or the weekend.

Next time, I took a bus. For the trip from New York to Boston, I paid $13, only one-tenth of the train ticket. The traffic was heavy, and it took five and half hours without a break.

The bus pricing system is more flexible. A bus company charges three times more for Sunday afternoon seats than weekday tickets. The demands are higher because many people return to Boston on Sunday after spending the weekend in New York. The front row seats on the upper deck of double-decker busses are sold for $9 more, a premium for the nice view. Also, those who reserve early enjoy a cheaper price. You can buy tickets at $1 to $3 for weekday trips if you reserve two months in advance.

But transportation is not the only demand-driven sector. Various travel service sites also reflect demand sensitively. The price fluctuates depending on when a room is booked. Hotels get to minimize vacancies while travelers can choose a room to fit their budget.

The fluctuating pricing system is based on supply and demand. When demand increases while supply remains limited, the price rises. When demand falls, the price drops. Depending on supply and demand, both premium prices and discounts are made possible. And this simple relationship has a tremendous impact on economic activities.

The pricing system is a measure of economic flexibility. In an economy with tight government intervention, a pricing system cannot become flexible. The government controls the price in order to avoid inflation. But when the pricing system does not work, the motivation for innovation does not rise. When the price is left to be determined by the market, the economy gains vitality. Irregular activities like a monopoly or price fixing need to be strictly controlled, but the Korean economy needs to consider pricing differentiation now.

The author is a New York correspondent for the JoongAng Ilbo.

JoongAng Ilbo, Feb. 28, Page 30


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