Economic shortage

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An Economic shortage of a good occurs when the amount demanded at a given price exceeds the amount supplied at that same price (see demand, supply). (The opposite condition, in which the amount demanded at a given price is less than the amount supplied at that price, is known as a surplus.)

Shortages occur when prices are prevented from moving to the market clearing price, or equilibrium price.

Cause

Shortages are caused by price ceilings set by government fiat. When a government sets a price ceiling it is in effect outlawing the sale or purchase of a good or service at prices above the ceiling. When a price ceiling is lower than the market clearing price, Demand and Supply remain unchanged but the amount demanded increases while the amount supplied decreases. In such a case the difference between the amount demanded and the amount supplied is known as a "shortage".

Effect

When it is illegal to buy or sell a product at a higher price, the only way consumers can compete for the goods in shortage is either through legal non-price competition or through illegal transactions at prices higher than the ceiling. The results include foregone consumption, queuing, bribery, theft, illegal sales, and other "black", "grey" or "informal" market behaviour.

Examples

Non-price competition: In markets such as in the former Soviet Union prices were artificially low by fiat, (i.e., high prices were outlawed). Soviets famously waited in line (or "queued") for price-controlled goods and services such as food, clothing, cars, and medicine. From the point of view of those waiting in line, such goods were in perpetual "short supply"; they were willing to pay more than the official price ceiling (as evidenced by their willingness to pay in the form of hours spent in line), but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationing". (See also "shortage economy".)

Black Markets: In the United States one of the most extreme examples of shortages are those caused by price ceilings on goods such as cocaine, heroin, and marijuana. Government enforced prohibition effectively establishes a price ceiling of zero; it is illegal to buy or sell them 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.

Incidence of Burden

In both the Soviet and U.S. cases the costs to the consumer for the respective goods in short supply are the same as, if not higher than, they would be under market-clearing conditions; the costs are simply borne differently under a shortage. It is strictly a political (that is, non-economic) question as to how those costs should be borne, and governments may find shortages on certain (or all) goods to be beneficial or advantageous, as evidenced in some of the examples below:

• 1973 oil crisis
• Prohibition
• Health Care
• Rent Control
• Minimum Wage (price floor)

Common misuse of the term

Shortages are a difference between "amount demanded" and "amount supplied" at a given price. Despite common misuse of the term "shortage", changes in price, even dramatic changes, do not cause shortages. Government prohibitions against paying higher prices for scarce goods causes shortages; at the price set by the government, people want more than is available. Alternatively, when prices are allowed to move freely, if the price of a good increases, people may wish the price was lower, but they still are able to obtain the amount they want at the higher price. When prices are allowed to change feely, people get what they pay for, there are no long lines, there is no black market, and the market clears; there is no "shortage".

References

• Exchange and Production: Competition, Coordination, and Control by Armen A. Alchain, William R. Allen [1]

Topics in microeconomics	Edit
Scarcity | Opportunity cost | Supply and demand | Elasticity | Economic surplus | Economic shortage | Aggregation of individual demand to total, or market, demand | Consumer theory | Production, costs, and pricing | Market form | Welfare economics | Market failure