Essential UCLA School of Economics: How Property Rights & Profits Reduce Discrimination

Welcome to the essential ideas of the UCLA school of Economics.

Building on the pioneering work of Nobel laureate Gary Becker,

who showed that companies that discriminate pay a cost in the form of lower profits,

Armen Alchian of the UCLA school found that government regulations that limit a company's

profits lowers the cost of discrimination which could lead to more discrimination.

Let's explore this important finding using an example.

A business in Marketville sells televisions. If it discriminates by refusing to hire blue

triangle people, the company will suffer from having a less productive workforce,

which reduces its profits. The same is true if the television company refuses to sell TVs to

blue triangle people—it will make less profit. So the company in Marketville has to decide

whether it cares more about discriminating against blue triangle people, or making

money. Let's say it chooses more profits and doesn't discriminate.

Now, suppose the government of Marketville becomes concerned about the large profits of television

shops, so it imposes a new regulation limiting how much profit television shops can make.

Now, the company doesn't face the same tradeoff between discriminating against blue triangle

people and profits. Before the regulation, it could maximize profits only by not discriminating.

But now, because the regulation limits profits, it might not lose any profits

by discriminating. The limit on profits actually leads to more discrimination.

This critical insight into how limits on profits make it less costly to discriminate

has furthered our understanding of the power and benefits of property rights.

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