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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
had lowered the price of that treatment, then perhaps a price decline for the good, so defined, could be justified. See Chapter 6 for more discussion of this issue.) Yet, on average, consumers are better off than before, even if their incomes and the prices of all other goods are the same. If the price level is not adjusted, the benefits of the technological innovation are missed and show up nowhere in the accounting system. Many economists are concerned that these phenomena are pervasive in modern economies, where the growth in quality has replaced the growth in quantity as the main engine of increased well-being, and where the production of new commodities is as important for economic growth as is the more efficient production of old ones. Neither Laspeyres price indexes nor conditional cost-of-living indexes are likely to capture this progress; it would likely be better captured by an unconditional COLI.
At present, there is probably no alternative to a selective treatment of whether or not the state of technology should be a conditioning variable for a COLI. Such selective treatment of the same variable, technological advance, it not a very comfortable position. It leaves much room for discretion of a kind that will undoubtedly be a source of debate for years to come. More generally, the unacceptability of the unconditional cost-of-living index, together with the apparent impossibility of devising a general way of conditioning the conditional cost-of-living index, has brought several members of the panel to the view that there has probably been too little research on other conceptual approaches, such as the test or stochastic view of index numbers.
There is another somewhat more technical issue concerning conditional cost-of-living indexes. The conditional cost of living itself, and thus a conditional COLI associated with it, depends not just on prices and the level of living but also on the levels chosen for nonmarket goods and other conditioning variables. If the government provides public schools, a family’s cost of living is different than when it does not, and the way in which the family’s COLI responds to price changes—the price of books or the price of tutoring—will depend on what the public school provides. Similarly, the conditional COLI of someone with a house to heat may be unaffected by changes in the price of fuel when the average temperature is 70°F, but very sensitive to fuel prices when the average temperature is 50°F. A conditional COLI will be independent of the environment only when preferences for market goods are “separable” from nonmarket goods or from characteristics of the environment. Separability requires that the way a family spends its money on market goods must be independent of the provision of nonmarket goods or that a family’s choice between food and fuel is independent of the outside temperature. Such conditions are unlikely to hold. Indeed, some public goods may altogether supplant some private goods from a family’s budget. When separability does not hold, the conditional cost-of-living index will be different depending on the level at which one chooses to hold constant the provision of nonmarket goods. It is hard to imagine such effects being taken into account in any practical CPI.