The Right Price? Look to The Interaction of Demand and Supply! -By Uddin Ifeanyi

Filed under: Economic Issues |
Ifeanyi Uddin

Ifeanyi Uddin

 

Where we fail as an economy, is in our response function to price signals ― sadly, this failure is currently exaggerated in two spheres of the economy: fuel prices, and the naira’s exchange rate. It is hard to make sense of why a nation of corner kiosk operators would insist on price controls as a response to supply bottlenecks.

Economics as a subject could be pretty recondite. Try making sense of the numbers off a regression analysis, for instance. In addition, it has not helped that mathematicians and others with extreme number-crunching competences have taken over the dismal science.

Otherwise, all that the study of economics reveals are the obvious relationships in our everyday transactions. Over the last three months, this lesson has been delivered most forcefully in the way the country’s fuel supply situation has played out. All of last week, the fuel queues looked to have returned to Lagos. And by Saturday, I bought fuel at N100 a litre. In the week or two to end-Friday, pump-station prices had cleaved close to government’s recommended retail price (RRP) for petrol ― N87/litre. And before that, prices had swung capriciously, with petrol on offer for anywhere between N100/litre and N150/litre.

How to interpret these swings? The street continues to harp on the thieving instincts of fuel stations owners, and official mention of the supply crisis is not complete without ringing denunciations of the patriotism of this group. You need only listen to the curses and swear words exchanged at the pumps, as customers pay up to appreciate the indignation they feel at having to pay more than the RRP for fuel.

Yet, as businessmen, each such customer would not be averse to seek for the different products and services they sell, as much price for these as the market can take. Few for-profit organisations would long subsist simply by reciting the national anthem and pledge!

Once it is clear that the price signals in the economy work, government’s challenge is not to mount the bully-pulpit in response to rising prices (this province, really should be left to our pastors and imams). Instead, the case is for rapidly easing entry and exit from the different markets where these constraints show up. In other words, our government owes us the responsibility of strengthening the price mechanism.

To the extent, however, that retailers of fuel obtain their merchandise at a subsidy from government’s depots, do they, thus, not bear a moral duty to re-sell at the official rate?

Unfortunately, this assumption takes every other aspect of the fuel supply situation as “normal”. Change the equation ever so slightly, and the market responses change accordingly. Remove a large body of demand, especially because an efficient mass transit system takes out the demand by so many car users for fuel to get to work on week days, and any of four things could happen (together, or separately) as supply runs way ahead of demand, and fuel stations see a marked drop off in vehicles turning in to fill their tanks: the stations begin to seek cost gains (by reducing staff, and automating the dispense process); marginal players in the market go under; the rest seek cheaper supply sources; and the more sophisticated improve their product mix. It would not matter at this point what the size is of government’s subsidies to the sector.

On the other hand, a dearth of supply similarly calls forth its own responses. Those customers who have a pressing need to travel would bid up prices to avoid spending an eternity on fuel queues. Suppliers would take advantage of cheaper supply just before the scarcity to cream the market (this usually is a one-off advantage); and the rest of us would alter our travel plans to reflect the higher costs pertaining thereto.

In the two months to end-June, we have seen the latter set of responses play out in full. As supply lines have thinned, prices have gone up, and consumers have adjusted their use patterns respectively. The argument then, that the Nigerian economy, somehow defies the patterns recognised by economic literature, is clearly a specious one.

Where we fail as an economy, is in our response function to price signals ― sadly, this failure is currently exaggerated in two spheres of the economy: fuel prices, and the naira’s exchange rate. It is hard to make sense of why a nation of corner kiosk operators would insist on price controls as a response to supply bottlenecks.

It is harder to understand why a government that has bungled everything it has set its hands to, including paying its staff’s salaries regularly, could still be persuaded that the solution to narrowing supply in any sector of the economy is to further force that sector deeper in its stifling embrace.

Once it is clear that the price signals in the economy work, government’s challenge is not to mount the bully-pulpit in response to rising prices (this province, really should be left to our pastors and imams). Instead, the case is for rapidly easing entry and exit from the different markets where these constraints show up. In other words, our government owes us the responsibility of strengthening the price mechanism. Of ensuring that when prices rise, economic actors have no let to moving into the said sector. And when prices fall, existing operators should have no constraints to downsizing their operations in response to the new incentives.

 

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