Sherwin Rosen's paper "Potato Paradoxes" in the December 1999 JPE is
well worth reading. I believe this was his last paper.
Nominally, the paper is about a new explanation for Giffen like
behavior but more generally it is about the interesting dynamics that
can occur when a good has a dual role as a consumption and production
good. Potatoes, for example, are both a consumption and a production
good because you must plant potatoes in order to get potatoes (they are
not grown from seed).
Consider what happens when the demand for potatoes increases. If
the increase in demand is expected be temporary then the usual situation
occurs but suppose the increase in demand is expected to be permanent
then farmers will want to hold more crop back for future production
(i.e. current supply will fall). It's possible that current supply
falls so much that an increase in demand leads to a fall in current
consumption!
Now consider supply changes. Suppose there is a temporary supply
shock, that is, current supply is reduced but future productivity is
expected not to change. In order to maintain next year's output,
farmers will increase their demand for current supply - thus a temporary
supply shock leads to a rise in price and an increase in demand! If the
shock is expected to be permanent, however, then farmers will want to
shift to other crops and thus reduce their potato savings.
Rosen argues that part of the tragedy of the potato famine was caused
because farmers mistakenly thought the blight was temporary (it lasted
for decades). Thus, in the face of the first supply shock farmers
increased their demand for potatoes which sadly instead of eating they
planted in the ground. Had the farmers realized the shock was permanent
they could have consumed more and switched earlier on to other crops.
Best
Alex
--
Alexander Tabarrok
Department of Economics, MSN 1D3
George Mason University
Fairfax, VA, 22030
Tel. 703-993-2314
and
Director of Research
The Independent Institute
100 Swan Way
Oakland, CA, 94621
Tel. 510-632-1366
