Incentives Matter: Blood Money
The Memphis Commercial-Appeal reported on Thursday, August 7 that Memphis and Mid-South area blood collection facilities are going to have extra hours on Friday with everyone who tries to donate getting a $10 gift card to Kroger. At issue is the reported shortage of O-positive blood, described as “extremely critical” by a representative from Lifeblood. The “crisis” of O-positive blood illustrates a couple of important economic principles.
First, incentives matter. I expect that there will be a substantial increase in the number of people who attempt to donate blood as a result of the gift card offer. There is a shortage of O-positive blood because people do not have an incentive to donate blood apart from the warm, fuzzy feeling that comes with doing something charitable. Charitable impulses only go so far, so we can expect to see the quantity of blood demanded outstripping the quantity of blood supplied. Whenever someone says “shortage,” it’s a sure bet that the price is too low.
Second, goods have to be rationed somehow. It would be great if everyone could have everything they want all the time, but in a world with scarce resources and limited information we have to make decisions about how to allocate resources. Prices assemble and transmit all of the information about what people want, in what quantities, and what they are willing to give up to get it at any given point in time. Short-circuiting the price mechanism means that alternative rationing schemes have to be devised. Blood donation officials are asking doctors “to encourage patients to act as their own blood donors” and are asking “hospitals to begin scrutinizing their use of O positive on a case by case basis.”
Third, this is yet another situation in which the law of unintended consequences rears its ugly head. Restrictions on the buying and selling of blood, like restrictions on the buying and selling of human organs, are supposed to prevent the poor from being unjustly exploited and to ensure a fair and equitable distribution of resources. Tragically, forsaking the market also means shortages and waste: people want more blood than people are willing to supply, and resources have to be used to decide what is a “just” and “equitable” distribution.
If there were a formal market for blood officials would not have to “scramble to ease the continuing shortage of O positive blood.” As prices fluctuate, people would buy and sell blood accordingly. One of the major barriers to developing such a market is what economist Al Roth calls “repugnance,” which is to say that many people find the idea of a market in blood morally offensive. If the goal is to get O-positive blood to people who most desperately need it, we should recognize the power of incentives and allow the market to work.