Baumol’s Cost Disease

Today, we’re digging into a concept that helps explain why certain services — such as college tuition, healthcare, or live theater — continue to increase in cost, even when their quality doesn’t appear to change.

It’s called Baumol’s Cost Disease, and while the name sounds medical, it’s really about the economics of labor, productivity, and pricing.

Let’s get smarter.

What Is Baumol’s Cost Disease?

Baumol’s Cost Disease is a theory developed by economists William Baumol and William Bowen in the 1960s. Their original question was:

Why do costs rise so quickly in performing arts, like live orchestras and theater, even when productivity doesn’t improve?