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Saying that “in an ideal world” housing prices should be cost plus minus depreciation seems begging the question. Why is this ideal? Ideal for whom? Should all

Saying that “in an ideal world” housing prices should be cost plus minus depreciation seems begging the question. Why is this ideal? Ideal for whom? Should all goods and services be priced using a cost plus model? What, then, would be the incentive for efficiency? Goods made by inexpensive means would be low priced by fiat, regardless of performance. I’m not saying that nothing should be cost plus, but there needs to be a strong justification for it.

lumost 5y ago
In a standard market economy with many participants the incentive for efficiency is in productive portions of the economy being able to deliver more for the same cost. In a cost+ model of value the cost is typically assessed in terms of building new today. If the original builder was particularly inefficient then it will lead to a lower valuation for the home as new buyers consider the cost of building new. This process incentivises more efficient means of production, when goods become very cheap relative to performance then consumers of that good can spend money elsewhere. In practice most material goods should be on a cost plus pricing model for this reason. The alternative is scarcity economics which hardly incentivizes efficiency but instead rewards market timing, monopolies, and other activities which don't do a lot to make the world better in the future.
- dougabug 5y ago
  Producing more is not always an option, sometimes it is not even desirable. Obesity is already a major health hazard throughout much of the First World, and overconsumption in many forms drives our unsustainable stripping of planetary resources. Consider two people who make violins, where their costs are comparable but one is widely deemed vastly superior to the other. Musicians would be willing to pay a hundred times more for the superior instrument, but the cost plus mandate requires they be sold at roughly the same price. The incentive to achieve this much higher level of skill at violin making is far lower than if we allow willing customers to vote with their wallets.

lumost 5y ago

In a standard market economy with many participants the incentive for efficiency is in productive portions of the economy being able to deliver more for the same cost. In a cost+ model of value the cost is typically assessed in terms of building new today. If the original builder was particularly inefficient then it will lead to a lower valuation for the home as new buyers consider the cost of building new. This process incentivises more efficient means of production, when goods become very cheap relative to performance then consumers of that good can spend money elsewhere. In practice most material goods should be on a cost plus pricing model for this reason. The alternative is scarcity economics which hardly incentivizes efficiency but instead rewards market timing, monopolies, and other activities which don't do a lot to make the world better in the future.

dougabug 5y ago
Producing more is not always an option, sometimes it is not even desirable. Obesity is already a major health hazard throughout much of the First World, and overconsumption in many forms drives our unsustainable stripping of planetary resources. Consider two people who make violins, where their costs are comparable but one is widely deemed vastly superior to the other. Musicians would be willing to pay a hundred times more for the superior instrument, but the cost plus mandate requires they be sold at roughly the same price. The incentive to achieve this much higher level of skill at violin making is far lower than if we allow willing customers to vote with their wallets.