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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
Changes in Tastes
A cost-of-living index compares the costs of equivalent standards of living under two different sets of prices. If someone becomes a vegetarian or decides that she prefers not to smoke, the cost of any given level of living will change, even with no change in prices. This can perhaps be dealt with in the same way as a change in the environment, regarding vegetarianism or nonvegetarianism as background variables that are subject to change. In this way, one can think about an unconditional cost-of-living index that calculates the change in the cost of living that comes about from both price and taste changes—becoming a vegetarian reduces the cost of living. In contrast, a conditional cost-of-living index calculates the change in costs, holding the original tastes fixed. It is not entirely clear how much of the original COLI concept is retained under either of these devices. The unconditional COLI essentially attaches values to different systems of tastes, something that most economists prefer to avoid. The conditional COLI is evaluating price changes according to tastes that are no longer valid, so that if tastes change rapidly and if the base period is held fixed for a long period of time, the conditional comparisons will become less and less relevant to consumers. But this is conceptually no different from the usual problems with selecting any base, and it is merely an argument for frequent updating of the base.
More serious are the practical questions, in particular, how to recognize taste change when it has taken place and, having done so, how to correct for it. Taste change is conceptually closely related to quality change. One is a change in the nature of goods, the other is a change in how goods are perceived. In general, it is not possible to distinguish one from the other by watching how consumers behave. Quality change is often directly observable from examination of the goods; observing taste change is much more difficult. Thus, one has little choice but to accept the conditional approach and to assume that tastes are constant.
In a COGI approach, where tastes are not mentioned, it might at first seem that taste change is not an issue. But the choice of a sensible basket is almost impossible if tastes are radically different in the two periods. This issue comes up forcefully when computing price indexes that compare price levels between two diverse countries such as the United States and India. Because the nature and pattern of consumer expenditures are so different in the two countries, with many goods that are bought in one not bought in the other, there is no comparable basket to price. Attempts to use one basket or the other can give absurd results if a staple in one country is not available in the other or is available only occasionally at an extremely high price.
Neither the COGI nor the COLI approach (nor any other we know of) is likely to do a very good job of constructing a CPI when there is a great deal of taste change. In this context, one might be seriously concerned about some of the psychological phenomena discussed above, that nothing makes people happy for long or the hedonic treadmill, which condemns a consumer to ever-increasing