Prices and markets.

Byline: Faisal Bari

I WAS in graduate school in Montreal in January 1998 when a number of provinces of Canada and some states of the US, on the eastern side, were hit by a severe ice storm. Hundreds of thousands of people found themselves without electricity for a week or more. And it was the height of winter. At one point, the government of Quebec had contemplated, seriously, that they might have to evacuate entire cities and move the population westward for some time.

In the wake of the ice storm, everything had shut down. Supply chains, for the supply of most goods and services, were severely disrupted while demand, for some goods at least, had increased suddenly. Flashlights and candles were suddenly in high demand. As were groceries. When shopkeepers, who had inventories of candles, batteries and flashlights, raised the prices of these items, there was a tremendous hue and cry in the media about price gouging and hoarding as well as accusations of making unfair profits. The government had moved speedily to ensure ready supplies of food items, but some of the other items became short rather quickly. The question is: were vendors right in increasing the prices of goods whose demand had suddenly increased manifold?

Similar issues have been seen in Pakistan many times. Most recently, we have seen price hikes as a result of Covid-19. Whenever a medicine is described as an important drug for Covid-19 treatment, its price increases manifold; the drug disappears from market shelves. There is immediate reaction, on social media at least, where people call drug sellers hoarders or black marketeers and portray them as unethical.

Prices are an important statistic in markets. They allow allocation decisions to be taken. Markets, based on demand and supply, determine prices. Those who can pay the price get the product, those who cannot pay the price, do not get the good.

Are there limits to how much the price should move when there is a demand or supply shock?

Market- or price-based allocations are not the only way of making decisions about who gets a particular good or service. We can and do have other ways of arriving at allocation decisions. We elect representatives through the one-person one-vote system. We form queues to get on the bus or to obtain tickets or access public health systems. We have rationing systems in some places and for some goods. We even use quotas for job allocations and access to goods and services. We can have need-based...