Why Are the Prices So Damn High?

This Mercatus Center study by Helland and Tabarrok investigates why prices in some sectors, notably education and healthcare, rise dramatically despite overall economic productivity gains. The authors explore various explanations, rejecting theories like administrative bloat and focusing instead on the Baumol effect. This effect posits that slower productivity growth in labor-intensive sectors, like those mentioned, leads to relatively higher prices compared to sectors with faster productivity improvements. A statistical analysis across numerous industries supports this conclusion, highlighting the importance of productivity differences in explaining price variations. The study concludes that understanding the Baumol effect is crucial for addressing rising costs in these essential sectors.