Giffen Goods

At the outset, let me confess to being slightly apprehensive about this post, which maybe treading a bit too far than I have ventured till date! But ...

Normal goods are characterised by negative price elasticity of demand. However, in case of Giffen Goods, the rise in price of the good results in increased demand. It is believed that there are no actual Giffen goods, though certain inferior goods, without close susbstitutes, exhibit under certain circumstances the characteristics of Giffen goods.

However, I have long been puzzled by two examples which seem to exhibit Giffen good characteristics. First, any market which is developing a bubble - stocks, property, currencies, etc - exhibit Giffen features. As the price of the asset rises, a self-fullfilling prophecy cycle is initiated and the asset prices go up, and the bubble builds up. The asset displays Giffen characterisitcs during its build up, and regardless of the rapidly increasing prices, the demand goes over the roof.

Primary Health Care is another good exhibiting Giffen features. How? If the cost of primary health care goes up, it is natural for people to cut back on their visits to clinics or hospitals. People respond by improvising with traditional home remedies or quack prescriptions. The result is that the disease or illness is mis-diagnosed or not properly attended to. This in turn aggravates the condition and in more cases than not, the patient needs the services of a doctor and often admission to hospitals. The patient ultimately ends up spending more that he would have in the first place, if proper treatment was given. (I am sure there are empirical studies bringing this out in clear quantitative terms) Interestingly, this is another reason why the Government ought to be subsidizing primary health care.

Primary Health Care meets the basic tests for Giffen goods. Primary Health Care is an inferior good, in so far as its consumption decreases with rising living standards. Rising living standards are associated with better nutrition and hygiene levels, thereby reducing the chances of primary health hazards. Also Primary Health Care cannot be susbstituted.

I have only drawn attention to two examples which have been rankling in my mind for sometime.