The Undercover Economist

Chapter 3 delves into the advantages and flaws of a free market. To illustrate how a perfectly free market would force people to behave truthfully, Harford opens this chapter with a thought experiment: If everyone is bound to tell the truth, what changes would that instill in an economy? For one, this would make price targeting a lot easier. To ascertain the most profitable price for a cappuccino, a barista could ask a customer how much they are willing to pay, and the customer would be forced to answer truthfully. If the customer is desperate, they might be willing to pay $15 for coffee. However, in this world of complete honesty, the customer could also force the barista to tell the truth about the real cost of producing a cappuccino. Then, the customer would discover that the real cost of the drink is less than $1. The customer could also ask the barista if there are cheaper coffee shops nearby and then use this information to drive down the price of the cappuccino to $1 since the barista’s options are to get a meager profit or none at all.

Harford uses this example to show how prices reveal the basic truth that “stores and customers do not have to buy and sell at a given price—they can always opt out” (65).