There was a (temporary) sand shortage due to a monsoon and availability does not imply sufficient supply. If there was no shortage of sand, even on the black market, the price would not have risen unless it was controlled by a cartel. Price capping is a good way to fight this kind of cartel because they were cornering the market by taking in all of the available supply and then raising the price.
The argument against that is that if sellers cannot increase prices in times of crisis they have no incentive to stockpile for such events. This leads to shortages and even higher prices on an unregulated black-market.
I'm not saying that I buy this line of reasoning, but there's the counter-argument.
Supply is only half of "supply & demand". Price increases discourage buying more than you need, which can help ensure that more people are able to get the things they need.
Unfettered price increases may not be the best solution, but capping prices too low just creates different problems.
Something's still missing though. If there really were a shortage, absent any irregularities, prices go up, someone else steps in to make it to earn more money, albeit maybe after sometime.
Seems to me just something wrong / slowing down the price adjustment mechanism? e.g. layers of regulation / bureaucracy or whatever it is the US runs on these days?
No; the simplest explanation is that increasing demand for a product with limited supply increases in price. That's literally Econ 101 - no cartel required.
You'll find a similar argument in any basic econ textbook. Put a cap on prices, then when demand rises for something (which normally leads to an increase in price, all other things being equal), the lack of an accompanying rise in price means there is no incentive to produce more of the good (no incentive for more producers to enter the market), so there isn't a corresponding increase in supply.
Might work okay in China, where the government can e.g. command factories to switch to producing masks, but it means American factory owners won't have any incentive to switch over to producing them.
That's only true when raising prices can lead to an increase in supply. There have been times when that is not the case, such as in the United States during WW II.
Those things are often suddenly rare because people hoard them, which can be prevented by allowing supply and demand to properly work. Prices should go up if goods are in more demand. In addition, the higher prices will motivate sellers to send more products to the impacted area. That eventually leads to price stabilization at the intersection of the supply and demand curve, i.e. how things are supposed to work.
Do the higher prices mean some people won't get any water? Yes! But if you artificially suppress prices, there will also be some people who don't get water, because other people will hoard it.
Wouldn't increasing the price increase scarcity, making it an even more contentious resource, thereby increasing conflict? On the other hand, a widely available, cheap resource is not worth fighting over.
I’m trying to think of a reason why the players in this market wouldn’t utilize a shortage like this to implicitly collude and fix the prices at the higher ranges until some additional competitor forces them down.
when supply is limited, there isn't really a difference between demand and cost. when supply went low, demand, and thus cost to the middlemen went way, way up. the middleman was just applying a markup and passing their cost on to consumers.
The economic theory is extensive on this. You have to let the price float if you want the market to find the optimal way to increase capacity.
If you insist on the price remaining steady even when the market conditions have changed radically you are choosing shortages in order to satisfy your belief that the price shouldn't change.
reply