We get it. It’s one year until the election and the Canadian Conservatives want to appear that they’re doing something right in order to defeat Liberal Party leader Justin Trudeau. One of these measures is probing the price gap between the United States and Canada, which is something that has been a long complaint among consumers in the Great White North for years.
Prime Minister Stephen Harper and his Tories have given the Competition Bureau greater regulatory powers to investigate the matter of why exactly there is a price discrepancy between products sold in Canada and the U.S. A part of the group’s powers is to demand why companies are determining their prices at certain levels.
Studies have previously identified that prices between the two countries is around 25 percent, and they also show that taxes are one of the main reasons for this gap. However, there are a lot of other reasons as to why the two nations have different prices, even when the greenback and loonie are at par.
First, let us concur that prices are absolutely imperative in the market economy. Prices send signals from one part of the globe to another, it suggests high supply and low demand – or vice versa – and it can signify that the money supply has immensely expanded.
The importance of prices is definitely similar to that of interest rates.
Now, how exactly do companies conclude how much certain products should be priced? Well, there are a wide variety of elements to consider – remember, every time you pay for a product you’re paying for an abundance of goods and services. Companies take into account labor, supplies, taxes, fuel, transportation, fees, revenues, profits, utilities and so on and so forth.
The U.S. and Canada maintain different tax systems and labor laws, which contributes immensely to the price discrepancy. If an Ontarian laborer is being paid $11, while a Kentucky clerk is making $7.25 then it’s understandable why a toaster or a dish rag will vary in the two countries. Meanwhile, if a certain commodity is more expensive in Canada than south of the border then prices could very well reflect this.
This all depends on the powers of the market.
Here is what economist Henry Hazlitt wrote in “Free Market Economics: A Basic Reader”:
“Let us begin on the elementary level and say that prices are determined by the supply and demand. If the relative demand for a product increases, consumers will be willing to pay more for it. Their competitive bids will both oblige them individually to pay more for it and enable producers to get more for it. This will raise the profit margins of the producers of that product. This, in turn, will tend to attract more firms into the manufacture of that product, and induce existing firms to invest more capital into making it. The increased production will tend to reduce the price of the product again, and to reduce the profit margin in making it. The increased investment in new manufacturing equipment may lower the cost of production. Or — particularly if we are concerned with some extractive industry such as petroleum, gold, silver, or copper — the increased demand and output may raise the cost of production. In any case, the price will have a definite effect on demand, output, and cost of production just as these in turn will affect price. All four — demand, supply, cost, and price — are interrelated. A change in one will bring changes in the others.
“Just as the demand, supply, cost, and price of any single commodity are all interrelated, so are the prices of all commodities related to each other. These relationships are both direct and indirect. Copper mines may yield silver as a by-product. This is connexity of production. If the price of copper goes too high, consumers may substitute aluminum for many uses. This is a connexity of substitution. Dacron and cotton are both used in drip-dry shirts; this is a connexity of consumption.”
What is perhaps the most fantastic aspect to this story is the fact that Prime Minister Harper maintains a Bachelor’s degree in economics. Shouldn’t he know these rudimentary lessons in economics? Perhaps his appetite for government intervention and idiocy has enhanced.
Ostensibly, Canadian Conservatives are just as inept as their Liberal counterparts when it comes to economics.
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