Sunday, February 17, 2013

Why are things so much cheaper in the United States?

Here is a view from an Austrian economist on the perplexing question of why prices on many items are some much higher in Canada, than the US even with the currencies at par value. This post first appeared here.

In 2011, Federal Finance Minister Jim Flaherty asked a committee to look into why Canadians are paying more than Americans for the same goods. Last week, the committee’s report came out, urging the federal government to close the price gap by lowering tariffs among other recommendations.
On the heels of a senate committee report on Canada-USA price gaps, Senator Joseph Day, chairman of the committee, acknowledged at a press conference there’s only so much government can do to address price discrepancies: “The government doesn’t determine prices. The marketplace determines prices,” says Senator Day.

To which Acting Vice-Provost and Program Head of Business at the University of Guelph-Humber, Dr. George Bragues, shakes his head.

“He’s being somewhat disingenuous,” says Dr. Bragues. He says that Senator Day is not realizing the full government role by neglecting the fact that while prices are mostly set by the market, the government influences the room in which the market has to operate.

“Sure, the market sets prices, but they do so within the confines set by public policy. And currently, public policy permits retailers to charge higher prices because they don’t have to worry about competition from the United States.”

“Canadians aren’t allowed to freely travel across the border and bring back whatever they want – without having to lie to a customs officer,” he adds.

The Chairman’s response to the problem of price discrepancies was to urge Canadians to bargain more aggressively with retailers for a better price.

Dr. Bragues: “The fundamental fact is, you really can’t be expected to bargain more aggressively for a pair of pants, or for a carton of milk at the store. Prices are set – and that’s just the way we do business in our society.”

Dr. Bragues explains that the leverage that a person has comes from the fact that there exists competitors that they can go to, who will offer lower prices. “That’s the bargaining advantage. And the government can provide that advantage with one simple solution.”

This brings Dr. Bragues to point out what he sees as the missing recommendation in the senate committee’s report.

“[The committee’s] recommendations focused on tariffs. But the key tariff is border crossing. Allow people to go to the United States – and as soon as they cross the border, allow them to bring back, say, $500 worth of goods without duty.”

“I guarantee that would jolt prices down. We would see a very different retail environment.”

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