Wednesday, May 11, 2011

Capitalism vs. Shortages

Most Canadians and Americans will say that they are believers in capitalism. But when push comes to shove, we’re often very annoyed by the consequences of capitalism.

A good example I experienced recently came when stiff winds uprooted trees, lifted roof shingles, and destroyed fences in my area. In the aftermath there was a run on fence posts and bags of cement. All the local suppliers ran out for about a week.

If the suppliers had raised prices during peak demand consumers would have screamed that they were being gouged. A part of capitalism is the idea that prices rise and fall with changes to supply and demand. If suppliers had raised prices high enough, only those who really wanted their fences fixed right away would have bought materials and there would not have been any shortage.

By being spared the consequences of capitalism in this case we had to put up with shortages. Rather than having the materials go to those willing to pay the most, they went to those who arrived at the store first.

8 comments:

  1. And then when some reporter sticks a microphone in the face of the stricken customer, you can always count on someone saying, "The government should do something about this!"

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  2. @Andy: Good one. Many people seem to believe that the government actually controls everything.

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  3. Good post. It seems we have a hybrid system to exchange goods and services. In most cases the market price balances the buyers and sellers. In other cases we have shortages, line-ups and waiting lists to control the exchange (e.g. Canadian health care).

    I expect that the richer one is, the more one would prefer the market approach.

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  4. @Blitzer68: I think you're right that poorer people are less likely to like a market approach. However, getting too far from a market approach can lead to a lack of incentive to produce (e.g., production in the former Soviet Union).

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  5. Actually, it is the higher prices that prevent shortages. If the price is high enough, people have more incentive to bring in supplies from other areas.

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  6. Now I figured it out why, when I left Canada in 2007, 6-bottles of Stella Artois were 12$ and 7 months later, when I got back, they were 13.75$. The demand must have gone up and it had nothing to do with the fact that foreign beer manufacturers have to sell through a store owned by local ones ;-)

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  7. I guess your example is more nuanced than it appears. A lone business that raises prices due to a temporary demand spike will be punished when demand returns to normal. Only when all businesses raise prices would there be no retribution from consumers.

    Do you suppose only some form of collusion would ensure all businesses could profit from extraordinary demand?

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  8. A comment from Gene got lost with the recent Blogger technical issues:

    "I guess your example is more nuanced than it appears. A lone business that raises prices due to a temporary demand spike will be punished when demand returns to normal. Only when all businesses raise prices would there be no retribution from consumers.

    Do you suppose only some form of collusion would ensure all businesses could profit from extraordinary demand?"

    If businesses chose to adjust prices when demand spikes temporarily, I don't think they would need to collude. They would naturally raise prices until demand and supply matched. However, it seems that most large businesses choose not to adjust prices in the face of short-tem demand spikes. Perhaps the reason is the customer retribution you mention. Another possibility is that it's expensive to track these things quickly.

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