Artificial scarcity

Artificial scarcity describes the scarcity of items even though the technology and production capacity exists to create an abundance. The term is aptly applied to non-rival resources, i.e. those that do not diminish due to one person's use, although there are other resources which could be categorized as artificially scarce. The most common causes are monopoly pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace. The inefficiency associated with artificial scarcity is formally known as a deadweight loss.

An example of artificial scarcity is often used when describing proprietary, or closed-source, computer software. Any software application can be easily duplicated billions of times over for a relatively cheap production price (an initial investment in a computer, an internet connection, and any power consumption costs). On the margin, the price of copying software is next to nothing, costing only a small amount of power and a fraction of a second. Things like serial numbers, license agreements, and intellectual property rights ensure that production is artificially lowered in order for business to gain a monetary benefit, thus giving businesses an incentive to produce more software. Technocrats argue that if the the price system were removed, there would be no personal incentive to artificially create scarcity in products, and thus something similar to the open source model of distribution would exist.

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thumb|right|485px|Production possibilities frontier of showing trade-off.]

With nearly all goods, a trade-off occurs when decisions are made about production. The graph shows the economic anomaly that occurs with artificially scarce products. Because leather boots consume resources, a trade-off is noticed between running shoes and boots; i.e. in order to produce more boots one has to produce fewer running shoes because of limited resources. This trade-off is illustrated by a move from P1 to P2 in the Production Possibilities graph on the left.

With computer software, no significant trade-off occurs. To produce more of a certain piece of digital information, since virtually no resources are used to copy the information there is no trade-off with the production of other things, like shoes and boots. In essence, problems of artificial scarcity usually arise when a good that was once scarce becomes abundant due to extreme increases in productivity and technology. [http://www.automation.com/sitepages/pid1698.php]

The need for artificial scarcity

In a market economic system, an abundance is not produced because excess product is considered an inefficient use of resources; those resources could be used elsewhere to produce something in greater demand to fulfill more wants. A paradox is reached with artificially scarce products, as an abundance is possible, yet without creating scarcity via legal or subversive means, there is minimal profitability. If scarcity is allowed to reach zero, the economic model fails. If natural scarcity no longer exists scarcity has to be created to ensure function of the system. [http://www.manageability.org/blog/stuff/artificial-scarcity/view]

Economic tools to promote artificial scarcity

* Price floor - This discourages access to a resource (creating scarcity and profits) and waste is produced.
* Price ceiling - Discourages production while encouraging consumption of a resource (two way creation of scarcity).
* Subsidies, which may be subsidies to production (usually creating surpluses) or subsidies to consumption (usually creating shortages).
* Cartels

These tools are used to prevent market failure, preserve profits for producers, or reduce costs for a certain group.

Responses to artificial scarcity

* The term is used by the Technocracy movement [http://www.technocracy.ca/simp/glossary.htm] to point out one flaw of productive inefficiency in the price system and takes the above example of digital information in microcosm. The movement claims that a technologically advanced state is capable of producing an abundance of virtually everything. Technocrats point out empirical evidence; even though the productive capacity exists to feed everyone in the world, we underproduce, we throw away, or we misallocate because there is no way to sell an abundance. They state that a conflict between scientific reality and economic tradition stifles the possibility for abundance. A price system only creates opportunities for scarce products.
** [http://www.technocracy.ca/modules.php?op=modload&name=Sections&file=index&req=viewarticle&artid=15&page=1 Article explaining technocratic beliefs of current economy]
* Standard free market responses to this assert that artificial scarcities are necessary to promote the development of goods in the first place. In the example of digital information, it may be free to copy information ad infinitum, but it requires a significant investment to develop the information in the first place (and if it didn't, there would be other cheap versions of that digital information being offered by other sellers). Another fair example is the drug industry. Production of drugs is fairly cheap on a large scale, but new drugs are very expensive. This is because the initial investment to develop a drug is generally billions of dollars. Typically drug companies have profit margins much higher than this investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development. A feature of many free market economies is also time limit in patent rights; after a set number of years enjoying an artificial scarcity, the patent wears off and cheap generic versions of a product enter the market. This creates a situation of accelerated economic growth and high economic payout for all levels of consumers, but also promotes a large rich-poor divide.

See also

*Scarcity
*Post scarcity
*Technocratic views of the Price system