Economic shortage

Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.

Economic shortages are related to price—when the price of an item is set below the going rate determined by supply and demand, there will be a shortage. In most cases, a shortage will compel firms to increase the price of a product until it reaches market equilibrium. Sometimes, however, external forces cause more permanent shortages—in other words, there is something preventing prices from rising or otherwise keeping supply and demand unbalanced.

In common use, the term "shortage" may refer to a situation where most people are unable to find a desired good at an affordable price. In the economic use of "shortage", however, the affordability of a good for the majority of people is not an issue: If people wish to have a certain good but cannot afford to pay the market price, their wish is not counted as part of demand.

Effects

In the case of government intervention in the market, there is always a trade-off, with positive and negative effects. For example, a price ceiling may cause a shortage, but it will also enable a certain portion of the population to purchase a product that they couldn't afford at market costs. Economic shortages are generally seen as undesirable since they lead to economic inefficiency. In absence of a price mechanism, resources are less likely to be distributed according to people's utility. Higher transaction costs and opportunity costs (e.g., in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.

More generally, regardless of their cause, shortages may result in:

• Black markets - illegal markets in which products that are unavailable in conventional markets are sold, or in which products with excess demand are sold at higher prices than in the conventional market.
• Artificial controls on demand, such as rationing.
• Non-monetary bargaining methods, such as time (for example queuing), nepotism, or even violence.
• Price discrimination
• The inability to purchase a product.

Examples

• In the former Soviet Union during the 1980s, prices were artificially low by fiat (i.e., high prices were outlawed). Soviet citizens waited in line (or "queued") for various price-controlled goods and services such as cars, apartments, or some types of clothing. From the point of view of those waiting in line, such goods were in perpetual "short supply"; some of them were willing and able to pay more than the official price ceiling, but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationing".

Other examples of economic shortages include:

• 1973 oil crisis, during which long lines and rationing were used to control demand.
• Prohibition, which resulted in the creation of a black market for liquor.

Whether an economic shortage of a certain good or service is beneficial or detrimental to society often depends on one's ethical and political views. For instance, consider the shortage of recreational drugs discussed above, and the controversies around the use of such drugs. Likewise, consider the economic shortage of cars in the Soviet Union during the 1980s: On the one hand, people had to wait in line to buy a new car; on the other hand, cars were more affordable than they would have been at market prices.

Shortages and "longages"

Garrett Hardin emphasized that a shortage of supply can just as well be viewed as a "longage" of demand. For instance, a shortage of food can just as well be called a longage of people (overpopulation). By looking at it from this view, he felt the problem could be better dealt with.^[1]

See also

• Shortage economy
• Scarcity
• Wood gas generator
• False shortage

References

1. ^ Video Interview with Garrett Hardin: Longages and Overpopulation Predictions Educational Communications program 803, 1990

• Alchian, Armen A.; Allen, William R.. Exchange and Production: Competition, Coordination, and Control. ISBN 0-534-01320-1.