Contempt of markets
The market is a beautiful thing. Sometimes slow, but often market mechanism provide information to both suppliers and consumers in an extremely effective manner: as prices increase, consumers reduce demand, suppliers increase supply.
The problem in Malaysia is that for several decades, the government has decided that it knew better than the markets. Take driving for example - it decided to spend tonnes of money subsidizing fuel and cars, causing widespread congestion, now even occurring in smaller cities in Malaysia. The solution?
Rather than letting the market decide how much a Proton ought to cost, and how much a driver ought to pay for fuel, we decide to throw money on public transport, hoping people would prefer using a bus–stuck in the same traffic as a car–when they can very well afford a car. Some prefer taking a bus, but most prefer the point-to-point nature of driving your own car.
Often, these price controls come with often altruistic notions - good intentions. If we don’t subsidize fuel, for example, the poor, poor people in some rural Kelantan village would starve to death. Perhaps. But often, using poor people as an excuse really make no sense. Take intercity express buses for example - the government regulates the fare, based on distance and toll charges. Obviously, buses in this case aren’t a necessity. A luxury even. If someone poor can’t afford it, it is not as if he can’t eke out a living or live for another day.
Yet, with the guise of consumer protection, the people least protected in this case seems to be the consumer. What happens when the price is set too low? A black market is formed. The problem here is twofold. Firstly, there is adverse selection: touts selling bus tickets have a better idea of demand and supply than someone buying a ticket at Pudu. Adverse selection occurs all the time, but it gets worse when touts do it because rarely do commuters have the chance to compare prices.
Worse, consumers aren’t protected by law. If a tout sells a ticket, claiming it is a nice, comfty, business-class express bus but instead some bas kilang, the passenger has no right to a refund or any legal recourse. Sure, the passenger can report the tout to the police, but only for the crime of touting. This further raises the prices of tickets in the black market - consumers wouldn’t want to negotiate the price down too much lest touts have little incentive to keep their word.
So, here, ironically consumers typically have to pay more for bus tickets, especially in peak periods, than they would in a free market; and they aren’t as protected, legally at least, as they would if bus companies can decide how much to charge for tickets.
Yes, occasionally there are market failures. But often intervention have little to do with correcting these market failures, rather it tends to make things worse. Sure, there are good intentions - creating new industries and jobs, increasing welfare - but as the saying goes, the road to hell is paved with good intentions.
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3 Responses to “Contempt of markets”
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If we want to help the poor, it is far more efficient to give them a lump sum of money rather than subsidise particular goods or services the government considers essential. The poor know their needs better than the government - perhaps they’d rather take the money spent on subsidising bus rides and use it to start a new business.
True, it would be more efficient than status quo: in the sense of Milton’s Negative Income Tax, for example. But there are many pitfalls: they could very well spend it on booze or gamble it away.
I think a better solution would be the NIT paid in vouchers that can be spent on education, housing, etc. - they won’t starve to death and their children have a shot in this world. They still would have a high level of choice (e.g. they could send their children to a neighbourhood school and spend more on health insurance). Efficiency would be less, but moral hazards prevented.
As for starting businesses, rather than handouts, I think better financing options (e.g. microfinancing) would be better off than handouts. Just that the high interest rates to make it viable is not politically palatable.
i would like to ask some question to Mr Rajan Rishyakaran, Did you know about actions that taken by government in solving this blak market problem?