Is Induced Demand A Phony Theory?

Does increasing the supply of something create demand for it? This is the premise of the “induced demand” theory.

Scott Beyer | August 18, 2018 | |

Does increasing the supply of something create demand for it? This is the premise behind the “induced demand” theory.

In modern urban politics, there are two groups, wildly different as they may be, who use the induced demand argument.  The first are anti-road types, who argue that new road construction encourages people to drive, thus increasing congestion. The second are anti-housing Nimbys, who argue that building luxury condos lures rich people into cities, raising prices beyond what they’d be if that housing hadn’t been built.

Both these groups, it seems, use flawed logic. Introducing a product onto the market will not automatically create demand for it; nobody would buy poison dog food just because it appeared on store shelves. If something is bought once it is placed before consumers, it means there was desire for it all along. That isn’t “induced” demand (as some define the term); that is latent demand–which is little different, as an economic concept, than just plain old demand.

The induced demand proponents—whether for housing or transportation—would be more credible if they noted this distinction. And they would better grasp the housing and congestion crises if they acknowledged how price distortions have upwardly skewed the demand in the first place. For housing, the forced undersupply in certain markets has artificially inflated prices. This has made those cities ripe for speculators, creating the illusion of high demand. For roads, meanwhile, the problem is oversupply. Drivers today access roads without having to pay direct fees—so they overuse them, creating congestion.

In either case, these are not examples of “induced demand”, of people using something just because it has been put in front of them. Their use actually proves their want. But we would better know the extent of housing and road demand if either were priced based on market signals, rather than government distortions.

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