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The Example of the Dutch Tulip Bubble

Ever wonder how the Dutch Tulip Bubble got started? It was actually not such a far fetched thing. It derived from the fact the SOME tulips were rare. Meaning that when there was a general prosperity in the Netherlands in seventeenth century, that they became collectors' items, driving up their prices.

When people observed this, they decided that ALL tulips were valuable, meaning that they bid up all the flowers, including the junky ones. A similar thing happened recently in the United States with real estate; the rise of high-end real estate provoked a general rise in property values.

BY DEFINITION, it is "hard" to value rare items. It is, however, not hard to value common items. They can be had just for the cost of replacing them. When the market price of such items is too much above replacement value, the bringing to the market of the new items (more tulips were planted, and harvested two years later), is by itself sufficient to burst the bubble.