Economic shortage

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Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.

Economic shortages are related to price - when the price of an item is "too low," there will be a shortage. In most cases, a shortage will compell firms to increase the price of a product until it reaches market equilibrium. Sometimes, however, external forces cause more permanent shortages - in other words, there is something preventing prices from rising or otherwise keeping supply and demand unbalanced.

In common use, the term "shortage" may refer to a situation where most people are unable to find a desired good at an affordable price. In the economic use of "shortage", however, the affordability of a good for the majority of people is not an issue: If people wish to have a cetain good but cannot afford to pay the market price, their wish is not counted as part of demand.

Contents

1 Causes
2 Effects
3 Examples
4 References

Causes

Shortages may be caused by a variety of factors, including:

Price ceilings, a type of price control which involves a government-imposed limit on the price of a product service.
Flat rate prices for consumption of scarce resources, especially when there are short term fluctuations in demand and supply.
Government ban on the sale of a product or service, such as prostitution or certain recreational drugs.
Many forms of market failure, such as monopolies, oligopolies, economic bubbles or the free-rider problem.

Effects

In the case of government intervention in the market, there is always a trade-off, with positive and negative effects. For example, a price ceiling may cause a shortage, but it will also enable a certain portion of the population to purchase a product that they couldn't afford at market costs. Economic shortages are generally seen as undesirable since they lead to economic inefficiency. In absence of a price mechanism, resources are less likely to be distributed according to people's utility. Higher transaction costs and opportunity costs (eg. in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.

More generally, regardless of their cause, shortages may result in:

Black markets - illegal markets in which products that are unavailable in conventional markets are sold, or in which products with excess demand are sold at higher prices than in the conventional market.
Artificial controls on demand, such as rationing.
Non-monetary bargaining methods, such as time (for example waiting in line), nepotism, or even violence.
Price discrimination
The inability to purchase a product.

Examples

In the former Soviet Union during the 1980s, prices were artificially low by fiat (i.e. high prices were outlawed). Soviet citizens waited in line (or "queued") for various price-controlled goods and services such as cars, apartments, or some types of clothing. From the point of view of those waiting in line, such goods were in perpetual "short supply"; some of them were willing and able to pay more than the official price ceiling, but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationing".

In the United States one of the most extreme examples of economic shortages are those caused by price ceilings on recreational drugs such as cocaine, heroin, and marijuana. Government enforced prohibition effectively establishes a price ceiling of zero; it is illegal to buy or sell these goods at any price. At the legally enforced price of zero, consumers face a shortage of legal cocaine. They opt for legal cocaine's best substitute, illegal cocaine, and resort to illegal transactions at prices higher than the ceiling. The shortage in this case prevails only within the legal market; the black market in fact clears at black market prices.

Other examples of economic shortages include:

1973 oil crisis, during which long lines and rationing were used to control demand.
Prohibition, which resulted in the creation of a black market for liquor.

Whether an economic shortage of a certain good or service is beneficial or detrimental to society often depends on one's ethical and political views. For instance, consider the shortage of recreational drugs discussed above, and the controversies around the use of such drugs. Likewise, consider the economic shortage of cars in the Soviet Union during the 1980s: On the one hand, people had to wait in line to buy a new car; on the other hand, cars were more affordable than they would have been at market prices.

References

Exchange and Production: Competition, Coordination, and Control by Armen A. Alchian, William R. Allen [link]

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