Prices Madness

What is more annoying than an unexpected rise of prices the moment you are broke?
… I have to admit this can be deeply frustrating.

Let’s assume you are not broke, but you had your expenditures on place and suddenly almost every item you planned to acquire is surprisingly almost double the price. The frustration you feel as an individual can be enormous not to mention if this happens for a wide variety of consumer commodities it can result to national level tension.

At the moments of needs like these is when government or politician rise up like false messiah and screw the whole things far beyond initial raise in prices. Before proceeding with this article I should declare that I’m not a professional economist and all things mentioned in this article are just my opinions. So, let us check some of common and appealing theories which can easily be adopted and erupt the whole economy inside out.

Should government set allowed/correct price list?
By far this is one of the most appealing solution. In simple terms, government decides the value for particular product and the rest of business have to comply. It’s a direct solution which can easily be address by a politician. But, does this actually work?
Let us begin by assuming government proposed price is lower than available price in market, this may sound like a noble decision at initial steps unless you step aside and try to make sense of the whole scenario. In brief, this case simply fall into two sub-categories, one being, suppliers of that particular product have decided to increase their profit margin by raising price values under free market conditions, or the second, suppliers of those particular products have been forced to raise product price due raise in operational cost or scarcity of product or anything else which lower their profit margin and consequently decide to maintaining their initial profit margin by raising prices of products in the market, in each of these sub-cases, it’s important to consider that, government neither own these businesses infrastructures nor having clear understanding of exactly profit margins desired by suppliers at market, in simple terms, it’s more correctly to assume government as a clueless third party organization having it’s own agenda.
If government decides to forcefully lower the price while suppliers intend to get more from their businesses, suppliers will hold their stocks and create pseudo-scarcity and consequently open the room for more illegal trade, this will cause more scarcity at end and government will collect less taxes as trade move from legal to illegal channels.
If government decide to forcefully lower the price while suppliers are struggling to maintain their initial profit margin, most of suppliers will stop operations and find other trade streams which have less restrictions and consequently this will result to far more scarcity and government will be forced either to retain to higher prices or destroy the whole suppliers network which existed before. In either of these cases both government and business owners will face far more negative consequence in long run. However since government leaders (politicians) only stay for a while and abandon their sits, they will less be affected by choices they made, not to mention some of civilians with unrealistic expectations whom might elect the same candidate who disrupt the whole business infrastructure and create far more worse condition for the community in general.

What about government doing business?
On previous scenarios we assumed government actually don’t get involved and only direct what to be done in particular market segment. But when government go to the extreme, they might as well opt for business monopoly. In fact, a politician or government leader may consider taking the whole business and operate as government wish in order to suit the needs of community. And this is what most of economist consider it as dooms days. At first it will look nice, as government tries to offer price base on mass demands contrary to market conditions and dynamics. While this looks appealing at early stages, soon government will realize it has to interact with global market which doesn’t care about wellness of her citizen and consequently face market competition faced by any business. Since government promised lower prices it will eventually forced to purchase bad services and product OR drive prices up and down as global market demands. On top of this, unlike individual operating a business, business operated by government is slow and full of bureaucrats which make it highly inefficient to adaptation of changes. To make this crap short, every time government took over the business and create monopoly, soon competition disappears, quality of products or service diminish and it’s almost impossible for individuals to improve quality of those services on that particular segment due to nature of how governments handle things. If you live in Tanzania you can easily spot huge difference in quality of services when you compare government operated sectors like electricity and water industry compared to telecommunication industry.

Global market neither care about anything nor having any intentions of it’s own,
So are demand and supply forces behind market dynamics.

So, what a way forward?
If you managed to reach to this point you might think,
“Does this mean government can’t do anything to improve price conditions?”
Actually, THERE IS A THING, and as we discussed,
It’s neither set it’s own prices,
Neither take the business by itself,
Neither threaten business owners and harass them.
When government realizes raise in price in particular segment, it’s simply implies there is scarcity in that particular niche whether this is created by market conditions or business owner it’s almost impossible to change it BUT as government the best approach it can take is to create more incentive for many suppliers into the niche by removing most of entrance barrier and ensure more and more participant to join the niche. When this happen the supply will automatic be stressed enough to create favorable conditions for demand and consequently price will get better with time as supply and demand balances. Most of other appealing solutions of setting prices and take control of market have proven to fail catastrophic including 1980s market crisis followed by painful inflation.

Bringing this to individual level, it’s painful to admit when government get advised about consequences of their decisions but yet decide to implement particular bad polices there is less you can do as an individual. However, less doesn’t mean nothing, in brief a decision of having personal dedicated way of accessing particular commodity/service independently, instead of relying on what offered by government streams can save you a big time, this simply means having independent supply of health services, education services, transport, etc. etc. As I mention earlier, it’s not a simple solution but it worth lifetime chance of making it happens.

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