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Writer's pictureVinay Payyapilly

Good words masquerading as bad - Part 2


 Photo by Meruyert Gonullu from Pexels
Photo by Meruyert Gonullu from Pexels

Words such as hoarding, profit, surge-pricing, black money have come to hold a very negative meaning in our society. The negativity attached to these words are taking a heavy toll on our society. Let us understand these through some examples.


In this article, I tackle the really wonderful word "HOARDING".


Let us take the example of a farmer. He plants onions and at the time of harvest the price is not nearly what he expected. At that point, he has two options. He can sell at the current price and cut his losses or he can put them in storage and wait until the prices go up.


In the first scenario, we do not go to the farmer and say, "We are sorry you had to bear this loss. We will make it up from the government's coffers." Instead the loss is the farmer's and the farmer's alone. The second option is not easy on the farmer. He needs to find a storage facility that can keep the onions from rotting while he waits for the price to go up. He pays for this facility. Now when the price goes up, before he can sell the onion to the highest bidder and make a profit, the government comes and confiscates his onions in the name of the greater good. He is branded a hoarder. But in truth he is a hero. Because he had the foresight to store his onions, his village or town now has onions. The next year, once again at the time of the harvest the prices are low. This time, remembering his previous experience, the farmers sells his onions at the low rate available. Six months later, again there are no onions. This time around, nobody stored onions in expectation of a better price. Result? No onions.


Let us take another example. A trader notices warnings from experts to the government about a second wave of the pandemic. She also notices that more and more people require oxygen as part of the treatment. She reaches out to her international suppliers and orders a thousand oxygen cylinders. Then she waits. The predicted demand for oxygen comes around.There the queue in front of her shop. She has two options. She could either sell the cylinders at the fixed price and follow a first-come-first-served system. Or she could let the market decide the price based on demand.


In the fist scenario, the person standing second in the queue does not have an emergency need for cylinders. But seeing how cylinders are rapidly running out, this person buys two cylinders because his parents might need them. Way back, there is a person in the queue whose husband needs the oxygen today. But because of her position in the queue, she ends up not getting the cylinder. It is the first person who really created the shortage on this occasion. We have seen this scenario play out in so many different settings, for things are diverse as medicines to toilet paper. But if we had let the market set the price, the price of those two cylinders may have put off the first person, which would have consequently meant that the more needy person would have gotten it.


Furthermore, seeing the price of cylinders in the market, more entrepreneurs such as our bright young lady would have sourced cylinders creating a glut in the market, which would automatically drive the prices down.


Who is the hoarder here? Is it the enterprising young lady who took cues from what the experts were saying and risked her money to procure those cylinders or the man who was buying something he did not need at the moment?


Let's take this thought experiment a little further. What if the government stepped in and said that the young woman couldn't sell her cylinders for anything more than the price decided by the government. She would most probably have still sold all her cylinders. But by capping the price, the incentive for other entrepreneurs to step in has been removed and the shortage continues for far longer than it should.


It is all about incentives. The incentive for the government is elections. The best way to win elections is to let a tragedy happen and then either step in a save the day or label enterprising people as hoarders and black marketeers. The incentive for private companies is profit. In order to make a profit, a private concern will provide the services required in exchange for a fee. If there is a shortage, they hike the prices to make a bigger profit. If there is excess, they reduce the price to reduce their holding costs. When there is an opportunity, they step in because it will make them a profit.


So before you ask the government to step in and control prices, ask yourself who would you depend on - the government that only wants to win the next election, or the private entrepreneur who wants to give you something in exchange for money?

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