« Evil From Within | Main | Pricey Stuff... »
December 13, 2004
A Reason Behind Every Shortage
"As an economist, whenever I hear the word 'shortage' I wait for the other shoe to drop. That other shoe is usually 'price control.' " --Dr. Thomas Sowell
This morning NPR had a segment on a major fuel shortage in Iraq. Currently, lines at some gas stations are up to 4 miles long. One man interviewed, who had been waiting in line for three days, bluntly stated "How do you explain this? I don't know."
NPR tried to offer some explanations itself but Mike Shuster, who authored the segment, was for the most part clueless about the causes. Searching for an answer he blamed the insurgency's targeting of the oil infrastructure along with corruption by state officials who have been moving their families and friends to the front of the lines. He even quoted an army official who had the gall to blame the Iraqis themselves for hoarding fuel (here's a hint... that's an effect, not the cause of the problem).
For a brief moment Shuster got close to the true source of the crisis by noting that the price on the black market was 10 times the price that Iraqis "preferred" to pay at the government stations. Unfortunately, the insight stopped there. The words "price control" were never mentioned.
Having the quote from Sowell in the back of my head, I was certain some sort of price controls had to be involved. With a little research I found this article from the The Future of Freedom Foundation. While it is dated a year ago, it states that at the time the price of gasoline was set by the U.S. at around 5 cents a gallon. I assume the price is now controlled by the interim Iraqi government but the evidence suggests that not much has changed.
In the 1970's when the U.S. government set price controls on gasoline, shortages and lines at the pump followed. This happened for the simple reason that incentives got out of whack. Consumers had no incentive to conserve at the artificially low prices, while producers had no incentive to search out new supplies as they would not reap the reward of their efforts. But once the price controls were lifted in one of the first acts of the Reagan administration, prices soon fell to below the former government regulated price. Aligning incentives apparently does matter.
Tragically, it looks like the situation in Iraq might not be that easy to solve. The same article from FFF states:
Of course, the gasoline-shortage crisis in Iraq is not as simple as it was in the United States, given that the oil industry in Iraq is government-owned. When the federal government finally lifted its price controls here in the United States, the price quickly rose to the free-market level and the lines disappeared. In Iraq, simply lifting the price controls would not solve the problem because the central planners would still be faced with the problem of constantly guessing what the free-market price should be in all the government-owned gas stations. There would still be, in the words of Ludwig von Mises, “planned chaos.”
You would think that with all the problems the Bush administration has bringing order to Afghanistan and Iraq, applying basic economic principles to the fledgling economies would be a given... but apparently not. Where is Ludwig Erhard when you need him?
update: Marginal Revolution has a similiar post here.
Posted by Peter Mork at December 13, 2004 10:33 PM
Trackback Pings
TrackBack URL for this entry:
http://www.economicswithaface.com/mt/mt-tb.cgi/78/[What is Peter Mork's first name?]
(Please add the answer to the question to the end of the link in order to trackback this entry.)
Comments
Email Comments Here