Lecture on Market Solutions in Food Banks

Introduction

• Discussion of how markets can solve problems and increase efficiency, using food banks as an example.
• Based on a paper by Kennis Prendergast, an economist at the University of Chicago.
• Focus on Feeding America, the largest food bank network and the third largest charity in the U.S.

Old System: Central Planning

• Before 2005, Feeding America used a central planning system.
  • Donations allocated to food banks via an algorithm, based on poverty and population.
  • System did not consider actual needs or preferences of food banks.
  • All types of food treated equally (e.g., chips = chicken).
  • Issues: unwanted/unneeded foods, transportation, nutritional value not considered.

Problems with Central Planning

• Food banks often received food they couldn't use.
• Ignored local preferences and constraints (e.g., freezer space).
• Knowledge problem: decision-makers lacked sufficient information.

New System: Market-Based Model

• Prendergast developed a system using shares as a form of currency.
• Food banks received shares based on need, could bid in an eBay-like system.
• Features of the system:
  • Food banks bid on loads of food using shares.
  • Shares could be saved or borrowed against for future use.
  • Shares could adjust with changes in needs.
  • Negative bids allowed for unwanted loads.

Benefits of the Market-Based System

• Food banks received more and higher-quality food.
• Allocations were more efficient and better matched to needs.
• Increased total food supply, feeding an additional 100,000 people per day.

Importance of Prices

• Prices signal value and create incentives.
• Previous system treated all food equally, new system differentiated based on value (e.g., peanut butter more valuable than potatoes).
• Market allocations maximize surplus and efficiency.

The Knowledge Problem

• Central planners cannot have all necessary information.
• Markets work through self-interest and decentralized decision-making.

Conclusion

• John Arnold's quote highlights the effectiveness of markets, even for skeptics.
• Success of market-based system in improving food bank operations.

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These notes capture the main points and lessons from the lecture on market solutions in food banks, providing a reference for understanding how economic principles can enhance charity operations.