This is the third post in a series explaining the fundamentals of economics inspired by the work of Thomas Sowell.  In the last post I showed how in a voluntary transaction both sides feel they are better off.  This in essence, creates wealth as both parties feel wealthier after the transaction than before.  This wealth creation effect can only be surmised in a voluntary transaction.  If either party is forced to make the transaction, the total wealth may be greater, unchanged, or lessened.

For example, lets say that government perceives we have a coffee shop problem.  New coffee shops are opening and forcing old coffee shops out of business.  Some coffee shops have long lines while others are empty.  To make things fair, a government official decided that each coffee shop has a territory.  If you live in that territory, you can only buy coffee from that coffee shop.  The coffee shop cannot sell to people outside of the territory.  Since there is no price competition, the government decides what it considers to be a fair price for coffee.  To level out demand, the government also says that each person must buy one and only one cup of coffee per day.

Now when someone buys a cup of coffee, each side may not think they are better off.  You might not want coffee but you need to buy it anyhow.  You might love coffee but you don’t like the coffee at this coffee shop.  The coffee shop might not want to sell you coffee because they can’t make money selling you coffee at this price.  Since the transaction is not voluntary, we can’t assume that each party considers themselves better off for the transaction.  Therefore the transaction may or may not create wealth.

Even if the government decision maker is the world’s leading expert on coffee shops, it doesn’t make a difference.  If a transaction is not voluntary, it also may not be wealth-creating.

The next topic in this series will discuss the creation of wealth and how one views this is the most fundamental of assumptions.