Obsession for cheap and quality

It seems that consumers are forever hungry for goods that are both cheap and of high quality. They always complain that producers, and firms are ripping them off with exorbitantly high prices. But who is ripping off whom? Because this particular line of reasoning signifies that the consumer is entitled to the entire benefit bestowed by the good. From theory, we know a particular good gives the producer some producer surplus, and the consumer, some consumer surplus. Making things sound as if goods should all be cheap, because costs of production for producers are naturally low, is tantamount to saying I should be the one gaining all the benefit.

If you were the producer, you would not charge that low prices too. So why ask of others to charge low prices?

The consequences is that the good becomes of low quality. Take for example, the Lasik service rendered by doctors in Singapore. It used to be an exclusive service for the rich and the vain. We bemoaned how technology is depriving the poor and the really needy for benefitting from the service. But we are forgetting that cheap and quality do not come hand in hand. When Lasik became hot in S'pore, it is easily predictable that many doctors will want to switch to providing this service, in line with standard economic theory. After all, a large part of sunk costs involves the initial paying for the pricey laser machine. If one charges a high enough price for the surgery, then we should be able to cover the costs.

Such a lucrative service, high demand, one fixed cost, and assymetric information involved, is just crying out for people to jump into providing the service. However, theory again tells us that as more and more people switch to providing one particular good, competition forces prices to lower. In fact competition will force these clinics to a price that barely covers their costs of operating. And the cost of operating is the fixed cost, the machine used for carrying out the surgery. Because service is something that cannot be easily measured in terms of money, we find that it is the cause for the price distortion.

Nonetheless, service costs money, even if it is not easily measurable. With prices barely covering the cost of operating the machine, service provided will falter inevitably. This manifests itself as lack of proper procedures, not enough of post operation checking.. etc. The result, is to earn yourself a frontpage article warning of the lack of professionalism of the surgery.