Two economists have hunted down a real-world example of one of economics’ rarest theoretical creatures — a Giffen good. A Giffen good defies normal market behavior — when the price of the good rises, demand for it actually increases. The existence of the phenomenon was first identified by a Victorian-era British statistician, Robert Giffen. Since then, economists have sought to nail down contemporary examples.
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A Giffen good (in parts of China)
They appear to have cracked the case. Economist Dani Rodrik examines a revised working paper by his colleagues at Harvard University’s John F. Kennedy School of Government, Rob Jensen and Nolan Miller, suggesting that rice and wheat flour behave as Giffen goods in the central Hunan and Gansu provinces of China.
As Mr. Giffen suggested more than 100 years ago, goods whose price and demand move in the same direction are most likely to be essential products such as food on which households spend a large part of their incomes. Wheat flour and rice fit the bill in central China. When the price of the good falls, the household in effect has become richer, with more income to spend. But rather than buy more rice at the cheaper price, the household might instead choose to spend its extra income on more expensive and previously unattainable items like meat.
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Not a Giffen good
The classic example of a Giffen good is a potato during the Irish potato famine. The Harvard economists say that that the example is probably apocryphal. There is certainly no data to support it. But when they subsidized the prices of rice and wheat flour for five months in China, they found that the subsidy led to reduced consumption of rice or wheat, and its removal to more consumption. Mr. Rodrik says that while this is an exciting find, its scope is limited: Environmentalists, he says, shouldn’t aim to depress consumption of fossil fuels by reducing the price of oil. — Robin Moroney