Question

Economists are fond of teaching students about the “Law of One Price” which suggests that the price of otherwise identical products should be the same in different areas. But, does the law of one price always hold? Clearly not when it comes to regional cost of living. It seems to cost a different amount to buy housing, schooling, etc. in different areas of the United States. Does this imply that we can safely assume that the law of one price is uninformative?

Answer 1

When we make any law it is based on ideal conditions and certain assumptions and in practical life these assumptions do not alway fullfil therefore the result slightly deviate from the law .Law of one price holds that the if two goods are identical then price of otherwise identical products should be the same in different areas.But in practical life it doesnt imply due to different factors as mentioned in question but generally the variation in price will be small for example if potato is sold at $2 per kg is one part of country it cant be sold at $200 in other part and while building regression model we include a error term to counter the deviation of result from the law and hence we can derive various informations so we can not say law of one price is non informative .