Two-Party Pricing Breaks Down As The Economy Becomes More Complex
Two-Party pricing cannot take into account either the costs or the benefits that the transaction imposes on third parties.
By David Grace (www.DavidGraceAuthor.com)
Classical Economics’ Two-Party Pricing
Classical economics rests on the foundation of two-party pricing, namely, that the price of a product or service is and should solely be determined by the bargaining power of the buyer versus that of the seller.
The problem with classical economics’ two-party pricing is that the two-party price reflects only the bargaining power of the buyer versus that of the seller, and the two-party price does not and cannot be increased or decreased to reflect either the costs the sale imposes on third parties or the benefits to third parties from that sale closing at a higher or lower price.
Expensive Vaccines Impose Costs On 3rd Parties — Cheap Vaccines Provide Benefits To 3rd Parties
For example, the market price for measles and polio vaccines cannot take into account the costs of an epidemic arising from an expensive vaccine nor can it take into account the benefits to employers, cities, hospitals, insurance companies and citizens who don’t get sick if the vaccine is priced so cheaply that almost everyone is vaccinated.
Cheap Unskilled Labor Imposes Costs On 3rd Parties — Higher Paid Labor Provides Benefits To 3rd Parties
The wage rate/price for unskilled labor is based upon the bargaining power of employers versus that of workers, and it does not take into account the massive costs of homelessness or the tax costs for welfare paid to people whose price for unskilled labor is not high enough to allow them to support themselves, nor does it take into account the benefits to the taxpayers, the economy and the country from high employment, low levels of welfare and a prosperous, working class.
The More Complex The Society, The More Sellers’ Costs Are Imposed On 3rd Parties
As a society becomes more complex, high and low product prices have more and more effects on more and more third parties.
A new, huge building used by thousands of people per day imposes huge traffic congestion, loss of local parking, police, pollution and other costs on neighboring property owners and the city, but two-party pricing does not recognize or pay those costs and therefore they cannot be factored into the rent calculation.
If those costs had been factored into the anticipated rent the cost might have been so high that a structure that large might not have been built in that location at all.
In a densely populated, complex society, classical economics’ two-party pricing model increasingly breaks down by failing to consider third-party costs in the same way that in a frame of reference where the relative velocity between objects is very large, classical mathematics breaks down by failing to consider relative changes in time and mass.
Simple arithmetic and two-party pricing work in a simple model, but both break down as the model becomes more complex.
In order to factor a transaction’s collateral costs on third parties and its benefits to third parties into a product’s price we need to move beyond Two-Party Pricing to Three-Party Pricing.
An Example Of Where Two-Party Pricing Breaks Down — The Price Paid For Recycled Plastic
The two-party price for recycled glass, aluminum, paper and plastic does not and cannot reflect the costs of pollution and uncollected litter nor can it reflect the costs of remediating pollution and litter.
The market price for recycled plastic is completely disconnected from the costs suffered by communities living with litter and the costs of removing and disposing of that litter.
The price per pound that a recycler will pay members of the public for empty plastic bottles is dictated by the cost of cleaning, shredding and packaging the empty bottles in relation to the amount that the plastic manufacturers are willing pay to purchase the recycled, shredded plastic.
If the raw plastic acquisition and processing costs exceed the sale price for the recycled plastic, then under two-party pricing there can be no recycling.
Today, many cities can no longer recycle plastic or paper because the market value of the recycled plastic and paper is less than what it costs the city to operate the recycling facility.
So, we have people who want to recycle. We want to get rid of the trash and litter. We don’t want to put tons of usable items into huge landfills, but we can’t recycle because the two-party pricing model cannot include any of those third party costs of litter in a way that makes recycling viable.
Nowhere in those two-party-recycling price calculations is there or can there be any price consideration for the damage to public and private property or the harm to wildlife from thousands of empty plastic bottles, or the cost to the public to collect, transport and dispose of the empty bottles in a landfill.
How Three-Party Pricing Enables Recycling
In order to get rid of litter, we first have to collect it, so we ask ourselves, “How much will we have to pay people to collect and turn in discarded plastic?”
Let’s say we determine that a price of, for example, $.20/pound will strongly motivate people to collect and turn in scrap plastic. We establish a nonprofit company to buy scrap plastic and advertise that we will pay $.20/pound for it.
Unemployed workers, part-time workers, children, members of charitable organizations, and homeless people soon begin to scour the city for scrap plastic.
Our nonprofit washes and shreds the turned-in plastic and sells it to companies that manufacture plastic products for the best price it can get, which is $.12 per pound, even though it costs the nonprofit $.22/pound to acquire, process and ship the scrap plastic, meaning that the nonprofit loses $.10 on every pound it sells.
Under two-party pricing that’s the end of the project. Dead. Toss the bottles into the garbage and then into the landfill.
But under three-party pricing we keep operating in the red.
At the end of the first quarter our non-profit’s total loss is $1 million. The government gives the nonprofit a check for one-million dollars and then levies a $1 million recycling fee on the companies that manufacture plastic.
In this way, the third-party costs of dealing with plastic litter become part of the plastic industry’s costs of doing business and, like other business costs, that recycling fee gets added into the price they charge for their product.
Let The Market Govern Sales Based On The Real Costs For Each Type Of Product
Plastic now becomes more expensive and consumers in the market decide between buying items made of plastic, paper, metal or glass.
As more plastic is used and discarded, the recycling costs increase, the fee the government levies on the plastic industry increases, and plastic becomes more expensive vis-a-vis other materials.
Of course, the cost of recycling paper, metal and glass is also charged back to those manufacturers as well.
Products still compete in the marketplace on price. Consumers still make the ultimate choice which products to buy.
In Three-Party Pricing 3rd Party Collateral Costs Are Imposed Back On The Seller
The three-party pricing model recognizes that sales by plastic manufacturers to plastic purchasers have negative consequences for third parties, namely litter. The government advances the cost of dealing with those consequences and then charges those third-party costs back to the sellers. This charge-back results in the sellers including those recycling costs into their products’ price.
Essentially, the government acts as the agent for the third parties, the members of the public, who are bearing those collateral costs resulting from the sale of the plastic products, in recovering their costs for the collection and disposal of the plastic litter.
In essence, the government advances the money to make the third parties whole, then collects that money from the sellers in a process that forces the sellers to add those costs into the price of their products.
The Difference Between Two-Party & Three-Party Pricing
The Three-Party Pricing mechanism factors third-party costs into the product’s price in situations where the two-party pricing model is unable to do so.
Three-party pricing can be applied to any product or service whose sale or use imposes material costs on third parties who are not participants in the direct buyer-seller price negotiation.
— David Grace (www.DavidGraceAuthor.com)
