Dear Friends,
It seems to me, when government limits supply, prices are always high. This axiom holds true, no matter what country’s government does it, or what form of government it is. In the dynamic world of economics, supply reacts and is interdependent with, demand. Both sides of the demand vs supply graph effect prices. This is basic economics yet our leaders act and argue like this fact is irrelevant. When they do… they do so at our risk.
The supply demand graph is a well known theory in economics. It explains how prices are set in an economy. One line on the graph is the supply line, the other is the demand line. They chart the amount of supply of a good or service at various price levels against the relative demand for that good or service at those same price levels. Where they intersect is the equilibrium price. As demand goes up prices necessarially rise, giving producers an incentive to raise supply, to make more profit. As the producers raise supply, the price intersection on the graph comes back down, back to the equilibrium price.
When government, through regulation, taxation or political favoritism, limits the ability of the producers to raise supply in the face of a demand increase, the supply line moves and the equilibrium price is raised. The more supply is constrained the higher prices will climb. This not only effects prices but more importantly… jobs as well.
When a government constrains the ability of it’s markets to react to a rise or drop in demand, the producers of that product or service, have incentive to move to another country, that doesn’t put the constraint on the ability of the market to meet demand. This siphons jobs from the country that limits it’s markets and sends them to other countries that do not. This is why Singapore is so wealthy.
Milton Friedman said, When a firm faces competition from a better competitor, there are two possible actions it can take, the first is to go to government to get anti competitive regulation passed, the other is to adapt. Of the two, the first is the easiest most taken path, and leads to general poverty, the second leads to a vibrant economy. Anti competitive regulation is a form of constraint on the market’s ability to flex with market demands. Another example is, unrealistic or poorly planned environmental regulation. If environmental regulation gets too expensive then firms have incentive to move their operation to other more lax countries. This doesn’t help the environment, (the product good or service is still produced but with no standardization leading to a worse environment), but does create tensions in the market.
Energy is an example of an industry that has been constrained in it’s ability to meet market demands. The American government has an obvious anti energy bent, in it’s regulation, rhetoric and actions. From the Keystone pipeline through the moratorium on offshore drilling to the crippling anti coal regulations, the US government led by Mr Obama, has openly stated it’s intention to make energy more expensive. The huge amount of natural gas that has been discovered in the continental US, despite the government, has caused a plummet in the price of gas based energy. Supply has outstripped demand. Today we see States and the Federal government seeking to put an and to this cheap energy, by placing moratoriums on hydro fracturing, the means to access the inexpensive gas.
Energy is by no means the only example, food production has been intentionally lowered under the FDR administration, lumber prices were raised when the government outlawed logging in Washington and Oregon, to protect the Spotted Owl, (which, as it turns out, wasn’t being effected by logging at all, but by the encroachment of the native Barred Owls)., the list goes on in every country and throughout history. When government engages in this type of action we are poorly served. Not only in our pocketbooks, from the higher prices, but in our job prospects as well.
The price of labor is also set by the demand vs supply of jobs. So when government limits supply prices are high and wages are low because jobs are few.
Sincerely,
John Pepin
