The Impact of the Housing Market

No matter which theory you follow to understand the latest recession, the housing market seems to always be the crux. One might wonder why one market is so important for the entire economy. After all, there are literally hundreds of thousands of markets in a complex economy like the U.S. has. Labor, transportation, food, and metals markets are some large ones. Smaller items, like radios, chairs, and t-shirts, also are traded in markets with fluid supplies and demands of their own. Why is it that no one talks about market failures in the food industry? 

Failures in the food market certainly exist (thanks, government subsidies), and food is certainly a necessity. But the housing market possesses a longer reach than most other markets. To understand the extensive influence of this market, it helps to imagine one's self in the position of the producers and buyers. To produce a house, the producer will need materials, or factors of production. Some possible production factors include: concrete, brick, wood/lumber, plumbing/pipes, wiring, insulation, carpeting, light fixtures, windows/glass, tile flooring, drywall, and many, many more. These factors of production also have their own factors of production. For example, wiring may rely on materials like copper. The producer must also rely on the transportation market, which relies on the energy market. And let's not forget the massive amounts of labor hours required to build a house. Throw in the labor market. From the consumers perspective, a new house will often be accompanied by new products to be used in the house. This could include appliances, electronics, furniture, cookware, curtains, or beds. It is hard to think of another market that draws from so many other materials and products. If we think of the economy as a pyramid, the housing market would be near the top. Since housing is naturally a large market (everyone wants a place to live), many of its underlying markets are pegged with it. This is how the housing market crisis was able to put our entire economy into a recession. A crash in the housing market means a crash for the economy.

Now that we have established its importance, how did the housing market crash play out? Let's start with the Community Reinvestment Act. The CRA, initiated in 1977 and strengthened in the 90s, created incentives for banks to give out loans to low-income families. This meant more credit available for taking out loans and buying houses. As more houses were built and bought, prices were rising, and the economy was thriving. When the Federal Reserve, in response to short recession in 2001, increased the money supply multiple times, investors saw the rising home prices as a signal to invest more in the market. The housing bubble continued to grow.

This may sound great, but the story obviously didn't end happily.  However, it's important to realize that many of these loans for houses wouldn't have been given without interference in the market, and for good reason.  These were not secure loans, and the economy wasn't as thriving as the low interest rate suggested. As a result, many defaulted on their loans, the houses were repossessed, and we were left with a colossal surplus in the housing market. As logic follows, with so many empty houses, there is no need to build new ones. Thus, the housing market came to a halt, bringing all of its underlying markets with it. 

So there you have it - the tale of how the housing market, along with some help from the U.S. government and the Federal Reserve, was able to bring down the entire world economy on its own.

Hayekian Brilliance

I recently discovered a magnificent paper titled “The Use of Knowledge in Society,” by the great economist, F.A. Hayek. This paper looks at the most basic economic question of how resources can be used in their most effective manner. Hayek begins by critiquing the popular method of approaching this problem. Commonly, in economics, the belief is that one can find a mathematical solution in resource management problems. But to find this solution, one must assume full information of all individual preferences within the market. Hayek explains why this is not realistic, and therefore, finding a solution based on the assumption of full information is no solution at all.

He states that the problem, in reality, is to make use of resources in the best possible way with only individuals knowing their respective preferences. This means that we face the problem of making the best possible use of what individual knowledge exists. He believes this has been hidden through use of mathematics in economic problem solving. Interestingly, Hayek relates this failure to see the real problem to issues in public policy. Many policymakers believe that we can find economic answers through mathematical analysis, but in doing so, oversimplify a complex system of individuals in which we do not have full knowledge of individual preferences.

I find this particular point to be extremely important. It seems that for the last century or so, the world has been run by scientists. Many of these scientists, while well-intentioned, believe the world to be made up of physical problems. They are quick to blame problems like the low supply of water in some countries on simply not having enough water. In reality, physical water shortages are uncommon, and economic water shortages are all too common. The scientists who do realize this seem to believe the solution lies in changing people minds or coercing people into managing the water supply more effectively. Either way, they believe that governments or people in power can directly manage the water supply efficiently. But these scientists must have never heard of Hayek. The only way that a resource can be managed effectively is through free markets and a pricing system.

Hayek goes on to explain why free markets are most efficient. There are three possible systems that can address the question of how we make the best use of resources, he states. The first is central planning, which he defines as, “direction of the whole economic system according to a unified plan.” Another option is competition, or “decentralized planning by separate persons.” The final possibility is through “delegation of planning to organized industries,” or monopolies.

The question of which system should be used depends on which makes the best use of knowledge. The answer depends on the type of knowledge we seek. Hayek clearly differentiates between two types of knowledge- scientific and specialized individual knowledge. He concedes that if scientific knowledge is the most important, a centrally planned economy may make the best use of it. However, he refutes the popular claim that science is the most important knowledge available. This is because of the power that lies in knowledge gained from individual specialization. The latter sort of knowledge tends to be more unique, as it often comes from years of training, education, or experience in a particular field. For this reason, individual knowledge is extremely important.

Hayek emphasizes how frictional the economy is. There are numerous changes that occur in the day-to-day economy, which must be dealt with through the use of individual knowledge. While some claim to account for these changes in aggregate statistics, Hayek discredits this. He does not believe such statistics can effectively consider the constant changes in the economy. A centrally planned economic system must take into account these numerous, daily changes. But since they cannot account for them in numbers, even a centrally planned economy will be forced to leave some decisions to the discretion of “man on the spot.” But to accept this is to admit the need of at least some decentralization.

Hayek more closely examines the aforementioned “man on the spot.” He asks, what and how much knowledge does this person need? Sufficient knowledge is passed to this person through the price system. Pricing is what allows individuals to neglect all outside factors of a decision. It also eliminates the need for individuals to make complicated mathematical calculations to determine the correct course of action for every decision. One must only examine prices.

This is explained further by Hayek through an example of a realistic resource – tin. The example asks us to assume tin has become more valuable in another part of the world. The effect this would have, assuming all else remains constant, is an increase in the price of tin. This acts as a signal to people everywhere that tin is now more valuable. The price forces people to consider their use of tin and realize it is now more expensive. Hayek sees beauty in this, as the individuals do not need to know why or where tin has become more valuable. It also takes no central decision maker to force people to economize their use of tin. The pricing system allows people to act rationally in managing world resources, while only considering their own options.

Considering the magnificence of the price system, Hayek is very critical of the desire for central planning in society. While many people are concerned with solving the world’s problems by themselves or from a central authority, Hayek does not believe this should be the goal. Instead, he believes the goal should be “extending the number of important operations which we can perform without thinking about them.” In the competitive price system, there is no significant thought or decision making required by any planner. People must only consider prices. Therefore, this system makes the most sense in working toward Hayek’s goal of limiting difficult decision making.

He also discusses another benefit to the price system. It is highly compatible with freedom. It is a system that not only allows for economic efficiency, but also maintains the rights of individuals to their choice of pursuits and use of knowledge and skills. A centrally planned economy would often conflict with individual freedoms, with individual decisions being made by a single planner.

In concluding, Hayek states that to assume a certain entity can have full knowledge is to assume away the true problem in economics of resource management. To truly address this problem, one must consider how this knowledge can be gained and communicated. The system that solves the problem of gaining and communicating knowledge is the price system.

While reading this paper, it is easy to see the relevance of Hayek’s argument to the traditional study of economics. One thing that came to mind was how most economic students study utility. In a typical utility problem, we are given a budget constraint and a utility function for two goods. Given this, we must solve the problem of what choice the individual will make. As a practice problem, this is fine. But I believe Hayek would argue that to use this sort of analysis related to policy making, would be erroneous. If we assume that we have full knowledge of individual utility functions, the problem becomes one of mathematics. However, it seems unlikely, not only to gain specific knowledge of preferences, but to be able to represent them easily in a function. Many topics in modern economics deal with similar assumptions. Could this possibly be why our economic leaders have failed us so terribly as of late? Gaining the knowledge portrayed by these assumptions, in reality, is much more difficult than solving the problems with the given assumptions.

I hope that our policymakers will begin to see that they do not have, and never will attain, full knowledge of individuals or resources. Markets cannot function properly when dictated by a central planner. Both the theoretical and empirical evidence lie on the free market’s side. Hayek views economics as the study of individual interactions, rather than the study of how to control these interactions. He was ahead of his time, and almost surely an outcast in 1940s Austria for his beliefs. Luckily, Hayek has found a great appreciation for his work in a new generation of economics students, including myself.

The Socialist's Scapegoat

It was 1991. I was only an infant, the first George Bush was in the White House, and in December of this year, the Soviet Union collapsed. They were caught up in the arms race and the space race with the U.S. They lost both of them. They were outspent by the U.S., and this led to the collapse of the Soviet Union. At least, that is what is commonly taught. It's never flat out said that the Soviet Union was attempting to organize society under the flawed system of socialism. If it is, it's not what I was taught in public school.

No, contrary to what seems to be popular belief, no matter how much the U.S. chose to spend, it's not what caused the collapse of the Soviet Union. It sounds a little silly when you think about it. Today, if another country decided it was going to spend massive amounts of money, would that cause the U.S. to collapse? Not unless they attacked us. Otherwise, who cares what another country spends. The truth is, the Soviet Union collapsed from within, from its failing economic and social structure. But it seems that history/media tends to cover up the negative consequences that have stemmed from socialism. As you will see, this isn't the only example.

If you ask someone what caused the latest recession in the U.S., they would most likely blame banks that gave out bad loans based on greed... To make a profit as the little guy's expense. If we believe this, the obvious response to such a problem would be to more strictly regulate the banks. It just so happens, that seems to be exactly what the public is calling for. The conclusion that has been reached is that unrestricted capitalism isn't practical. Regrettably, I once believed this. We tend to believe things, if everyone is saying it. 

Let's look at the real causes of the recession. Yes, it goes back to the banks, but it goes beyond that. The accusation is that banks gave out bad loans based on greed. Well, in a free market system, there is no profit in giving out bad loans. Banks make a profit when loans are payed back, so they should have no reason to give out bad loans. So why were these loans given? It goes back to the Community Reinvestment Act, through which the government gave banks incentives to give out loans to lower income levels. This was done in the name of helping the poor (it didn't) - A socialistic policy. 

This policy led directly to the artificial housing boom. Those loans should have never been made, as there was no real credit available to many of the people who got loans. They would have never been made in a purely capitalistic system. But they were. Then reality struck back, when people couldn't pay off these loans based off of false credit. Seems like, if nothing else, this would be a great economic lesson for us. But, no, somehow they still managed to blame the recession on capitalism and greed, and we believed it. 

When when will the people stand up to the propagandists? My hope is that people won't believe what they are told, but will look into issues thoroughly, then make their own conclusions. If not, the problems we are facing may continue to be attributed to the wrong cause. I expect the lies to continue. I have already seen capitalism blamed for the recent riots in England. Why, you ask? It's because someone whose livelihood depends on defending a flawed system must find a scapegoat. Socialists found capitalism.  

A Free Market Approach to the Great Depression

Some of the most important lessons can be learned by studying history - that's why I have always enjoyed it. This is especially true for economics. If we want to understand how to deal with our current economic problems, let us look to the past and learn from the mistakes of those before us. The Great Depression is naturally a time that most economists like to point to, as a lesson. Being the most severe and long lasting recession in U.S. history, there is definitely a lot we can learn from it. While most of us studied The Depression in school, it seems that the general public does not have a firm understanding of it. Much of what we do understand is based off of myths and fallacies. I want to approach this subject from an Austrian economics view, a more free-market perspective, in order to dispute some of the misconceptions of the Depression Era.

Consider the common teachings on the Great Depression. We have all been told that it was started by the stock market crash of 1929. Stocks were being bid up higher and higher, until it was realized that the stocks were over-valued. People began to sell. Stock prices dropped. The people who hadn't sold realized their stocks were worthless, causing a rush on the banks. But the banks were broke too, and suddenly the entire country was poor.

Then we were told of how we escaped the Depression. The FDIC was created, the government began guaranteeing people's bank savings. This was part of the Glass-Stegal Act, which also prevented the banks from investing people's savings. All of this was meant to gain back the saver's faith in the banking system, and stabilize the economy. Then we look to monetary policy. The Federal Reserve began buying up treasury securities (although they temporarily sold them, running a contractionary policy, and worsening the Depression), increasing the money supply, and expanding the supply of credit, in hopes of increasing economic activity. Finally, we are taught that the long Depression ended with World War II. As unemployment dropped to nearly nothing, and GDP grew exponentially, it was clear that the Depression was over - or so they say.

Now, let's look at this from a different, and in my opinion more logical, point of view. We know that the Great Depression started with the crash of '29. But what caused the crash? Markets have natural positive and negative shocks, but they don't just crash spontaneously.  It's given that stocks were tremendously overvalued, and eventually the bubble burst. But a free-market economist would tell you that a market should not naturally be that far out of equilibrium. The only way for stocks to be so overvalued, is if the market was tampered with.

We know about the bust, what about the boom? Today, it is known as the Roaring Twenties. It was a time when GDP and prosperity rose exponentially. How did this all come about, we wonder. First, we should look to the creation of the Federal Reserve in 1913. As a young entity, the Fed would prove to make several mistakes. The first of which came in the early 1920s, when the Bank of England, wanting to keep its artificially high-valued currency, asked the U.S. to devalue the dollar. We agreed, mainly in order to help farmers increase their exports. The Fed expanded the credit supply through an increase in the money supply by about 60%. Prior to this, the country had also seen excessive spending to finance World War I.

This expansion in credit was created out of thin air. There was no real wealth being added to society, so there was no real increase in the supply of credit. It was a mythical credit expansion based off of the Fed's expansionary policies and the government's printing of money. The excess spending added no real wealth. In fact, the spending for WWI only destroyed, not created, wealth. But as the credit market was manipulated, people believed the expansion to be real and increased their spending during the Roaring Twenties. Since this false wealth could not continue forever, it had to leave the economy in some form - either through inflation or devalued capital. Think of the stock crash as the devaluing of capital. The stocks that had risen in price, had not risen in value. As people realized this, it created a run on the stock, then a run on the banks. Benjamin Strong, Governor of the Federal Reserve Bank of New York from 1914 to 1928, put it like this - "Very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis." 

Critics of Austrian economics often argue that it offers no solutions. I would disagree. While it may not offer the same crowd pleasing, slogan solutions that Keynesian economics does, it offers more practical and logical solutions. Instead of looking at the busts, we should look at preventing artificial economic booms. It is  important to understand that credit cannot be truly expanded at the snap of the Fed's fingers. The government cannot add wealth to the country with the push of a button. Solution: stop manipulating the markets.

The commonly understood solutions to the Depression seem fallacious. The Glass-Stegal Act, while probably necessary only because of the prior harmful government interference, may have done more harm than good. As stated, it prevented banks from investing people's savings. This may sound good, however, it can be viewed as a prevention of real credit expansion. Banks are able to create money, by putting people's savings to economic use until the people need those savings. They lend the money to a corporation, through stocks, the corporation then uses that money for further investment. The bank gets the return on the investment, and is then able to loan out more money. This differs from the false credit expansion created by the Federal Reserve, because the corporation was able to add real value to the economy through the extra money available for investment. Unfortunately, this aspect of the Glass-Stegal Act remained in effect until 1999, so we will never know the economic growth that was potentially lost.

One aspect of Glass-Stegal that remains in place is the FDIC. The FDIC has helped people keep their faith in the banks, but is this such a great thing? The fact is, when you put your money in a bank, there is some risk involved, however slight it may be. Banks make money by loaning out and investing our savings. There is a chance, when you put money in a bank, that you will never see it again. Once again, it's not high risk, but there is a risk that should be accounted for. The FDIC manipulates with the market by taking away that risk. Falsely taking it away, that is. The FDIC can only protect your savings as long as the government can afford it. If the banks went broke, and everyone demanded payment from the FDIC, I doubt they would be able to pay off the entire country. Banks are not meant to be 100% safe, nor should they be considered so.

Possibly the most irritating myth of the Great Depression is that we escaped it through WWII. While it is true that unemployment went down and GDP rose during WWII, this says nothing about the quality of life. Of course unemployment was down, the men were overseas fighting a war. Back home, many basic necessities were rationed. That doesn't sound like prosperity to me. This is a perfect example of why unemployment rates are not always a good economic indicator. If you go by unemployment rates, might as well have locked everyone in jail, and considered the Depression over.

Truly, the Depression did not end until after WWII. At this time, government spending was finally cut. Thanks to Keynesian economics, we were able to end the Great Depression, only a couple of decades after it began.

Being one of the worst crises in American history, the Great Depression should be an important point of study. Unfortunately, most of us only understand generalities of the time period. "The stock market crash of 1929 led to the Great Depression." This tells us very little, and isn't helping us learn from the mistakes of our past. The free market approach is almost an untold story, in education. It is my hope that this perspective will be given a chance. After all, as evidenced by the latest recession, we haven't learned that much from Keynes.

The Job Creators

What will you do to create jobs? - This is a common question we hear asked of political candidates. It sounds like a fair question, especially in a country that has seen persistently high unemployment rates for a few years. People want to know what will be done to raise employment, and many believe this will be a deciding factor in the 2012 presidential election. 

However, while I agree that economic concerns need to be taken highly into account during the next election, I take issue with this question. When did the people of the United States, traditionally the most entrepreneurial country in the world, begin to expect the government to create the jobs? No, contrary to what seems to be popular belief, the government shouldn't create our jobs, nor should politicians. People are the job creators. 

Sure, the Obama stimulus created jobs, but temporarily. And in most cases, they seemed to be jobs given just for the sake of jobs. The result of these jobs, that I have witnessed, is pointless, useless new roads were built all over the country. At whose expense were the jobs? The taxpayer's. Yet the people who paid for these jobs, didn't get to tell their employees what jobs they wanted done. No, the jobs were determined through central planning, with the idea that it doesn't matter what the job is, as long as people are working. The 780 billion dollar stimulus was the largest in our history. If government spending truly creates more jobs, we should have seen a fast recovery from the recession. To the contrary, we have seen an abnormally slow recovery. 

So I propose a different sort of economic question for the candidates. What will they do to allow job growth and prosperity? No, I don't want the government to create a job for me at the taxpayer's expense. All I ask, and what I believe my fellow Americans should ask, is - What will the government do to stay out of the way, and allow jobs to thrive?

This doesn't mean "do nothing." There is a lot that can be done, but we should look at what the government needs to cut, rather than what it needs to add. It's not difficult to see what is causing harm to businesses. I spoke to a local air conditioning repair business owner yesterday. He had only three complaints. The first of which was the record setting heat wave, here in Little Rock. Then, he told me of how the sharply rising freon costs (stemming from EPA regulations) have hurt his business. The other complaint was about the government's mandates on thermostats, in an attempt to limit mercury (although the new thermostats still use mercury). Apparently, the government has created a monopoly on thermostats. As the A/C repairman put it, "It's not OK for anyone else to sell something with mercury in it, but it's OK for the government." 

The traditional way of approaching macroeconomic problems is to look at the aggregate numbers, and try to manipulate them into improvement. In my opinion, looking at the motivations of individuals, like my A/C repairman and other business owners, would be a better way of addressing economic problems. If you take this approach, it's blatantly obvious what is holding the recovery back. Here's a hint: it's not the lack of regulation in the market.

Let's stop asking our elected officials what they can do for us. Ask them what they can stop doing.

Life, Liberty, and the Pursuit of Great YouTube Videos

Here are some great videos on personal and economic freedoms:

One thing that stands out in this video is- the poorest people in the most free countries have a higher share of wealth than poor people in the least free countries. This means poor people in capitalist countries have a higher share of the wealth than they would in a communist country! Amazing, isn't it? How can this be? When you give so much power to a central government, you can't expect to be treated equally. Who do you suppose benefits from a communist system? Mostly, government officials and employees. They are able to build wealth while they force everyone else to be "equal."

If you went to a public school (like me), you've probably seen the graphs showing the inequality of wealth in the U.S. It's used as an argument for the redistribution of wealth, but if you consider the facts brought up in the above video, it really doesn't make sense. That's okay. Propaganda doesn't have to make sense.

This is one of my favorite videos, but I won't say much about it because it articulates the point way better than I could. But if you agree with this video, you must question even the basic idea of a progressive income tax system.

This video brings up a great point that many seem to forget. When we ask for government security, we are also asking for limitations on liberty. So, I ask you, how far do we allow the government to go in securing us? Our welfare, our health, our property? When you allow the government security over these things, you give also give up your own right to choose how you manage those things. Take public health care for example - If the government secures your health, they now have a right to tell you want you can and cannot eat or drink. Personally, I would rather be held responsible for my own health, and choose what I consume.

A Tragic Hypocrisy

The manufacturing industry of the United States is widely regarded as the most important industry for jobs. We hear it from the politicians. We hear it from the media. We even start to hear it from ourselves. It's used as a reason for bailing out large automotive companies and as an argument for tariffs and quotas against countries such as China, that compete with our manufacturing industry. They're too big to fail, of course. What would happen to the workers and their families if General Motors closed down?

I don't know of many people who aspire to be factory workers, but in the U.S., we have a peculiar obsession with those types of jobs. Has anyone questioned the importance of the manufacturing industry? If someone in the media has, it has went unnoticed. Certainly no politicians have. With the Democratic Party being funded by labor unions, and the Republicans funded by corporate fat cats, they wouldn't dare.

I guess it will have to be me.

Let me first say that I will not refute that manufacturing does currently provide many jobs for our economy. What I do argue is that those jobs are not any more important than any other type of job, and they are very much replaceable with other industries. Consider another industry that was once considered the backbone of America - farming.

Until the mid 1900's, 70-80% of jobs in the United States were farming related. Today, that number is down to about 2%. Yes, those farming jobs were "lost." But how many people would like to go back to those days, for the sake of keeping so-called important jobs? We produce significantly more food, with less effort now. So what happened to the people who lost their farming job? They moved on to something else that there was demand for, namely manufacturing jobs.

Sounds like the transition went smoothly, right? Wrong. Just as there are people today arguing that the manufacturing industry should be kept afloat at the expense of the public, there were people making the same arguments for farming jobs then. Franklin Roosevelt went as far as to pay farmers to destroy their crops! The intention was to keep the farmers well off (remember, this was the "important" industry of the time) and raise the price of food, for the farmers benefits. Well, anyone with common sense would tell you that destroying a country's food supply during a depression could have some negative effects on consumers, and it did. Many went hungry. Our government propped up an industry that was trying to shrink. Who knows how much the country was held back due to policies preventing the economy from progressing. But it was all for the sake of the precious farming jobs.

This was a long time ago, in a very different era. So you may be wondering what FDR's food destruction policies have to do with current industrial protectionists. We would never be so foolish as to destroy resources for the sake of a certain industry, would we? It turns out, we're just as foolish now as we ever were. Consider what a tariff or quota truly does. It limits the availability and raises the prices of goods, in the name of job protection. Sounds familiar, doesn't it? I wonder which industry we are preventing from development now.

My Republican friends are the first to bash FDR, especially for his food destruction plan. He's considered one of the worst presidents ever, by some (and I would agree with that). Yet many of those same people clamor for quotas and tariffs against those job-killing Chinese. That, my friends, is a tragic hypocrisy.

A Follow Up- Who Really Pays the Price?

In my previous post, the question was posed- When a business incurs and unexpected cost, is it passed down to the consumer? I came to the conclusion that it was not, but promised I would take the question into further consideration. Well, after months of deliberation, I have a definitive answer. I know all 3 of you eager readers out there have been waiting for a follow up. I will not disappoint.

While trying to answer the, by now, age-old question, there was a flaw in my thought process. I was attempting to find a general answer for a question that needs to be addressed on a case-by-case basis.

Let's look at the question from perspective of a large corporation, McDonald's. When Mickey D's experiences an unexpected cost (maybe they lost a lawsuit over hot coffee), does the price of a Big Mac rise? In this scenario, my logic works well. McDonald's would have already been charging the profit maximizing price. An increase or decrease in the price of a Big Mac in response to the unexpected outside cost, would only decrease McDonald's profits.

Now, we'll attack this question from another view point. A poor college student decides to start producing and selling bowls. One day, while deliver bowls, the entrepreneur is ticketed for speeding. Would this mean an increase in the price of bowls? Most likely, yes.

What's the difference? A large corporation will likely have large amounts of excess/rainy day funds. When they receive an unexpected cost, they can use these excess funds to maintain the same level of production of services or products (in this case, Big Macs). So for McDonald's, the supply curve doesn't shift leaving them at the same profit maximization price.

On the other hand, the poor college student likely has very limited excess funds. That means that they will be able to afford less resources, after the unexpected cost. In turn, they are not able to produce as many bowls. This would be a negative supply shock for the poor college student, increasing the profit maximization price.

Obviously, most businesses are somewhere in between, but in each case, the answer to the question depends on whether or not the business has enough in reserve to make up for the cost. If they do, it would be in their best interest to maintain the current level of profit. Meaning, there would not be a change in prices. If they do not, you could realistically see the customers pay the price. To summarize, it is possible that consumers would pay for an unexpected cost to a particular firm. Does that mean it's likely? Since most businesses seem to have some sort of excess or rainy day funds (especially the ones that would be subjected to the most extreme unexpected costs), I would think not.

So there you have it. I will now consider this case closed, as I have spent way too much time on it.