Economic shortage

Causes

Shortages may be caused by a variety of factors, including:

* War - See also: War economy

* Price ceilings, a type of price control which involves a government-imposed limit on the price of a product or service.

* Flat rate prices for consumption of scarce resources, especially when there are short term fluctuations in demand and supply.

* Government ban on the sale of a product or service, such as prostitution or certain recreational drugs.

* Many forms of market failure, such as monopolies, oligopolies, economic bubbles or the free-rider problem.

* Depletion of resources and raw materials needed for the finished product.

Effects

In the case of government intervention in the market, there is always a trade-off, with positive and negative effects. For example, a price ceiling may cause a shortage, but it will also enable a certain portion of the population to purchase a product that they couldn't afford at market costs. Economic shortages are generally seen as undesirable since they lead to economic inefficiency. In absence of a price mechanism, resources are less likely to be distributed according to people's utility. Higher transaction costs and opportunity costs (eg. in the form of lost time) also mean that the distribution process is wasteful. Both of these factors contribute to a decrease in aggregate wealth.

More generally, regardless of their cause, shortages may result in:

* Black markets - illegal markets in which products that are unavailable in conventional markets are sold, or in which products with excess demand are sold at higher prices than in the conventional market.

* Artificial controls on demand, such as rationing.

* Non-monetary bargaining methods, such as time (for example waiting in line), nepotism, or even violence.

* Price discrimination

* The inability to purchase a product.

Examples

* In the former Soviet Union during the 1980s, prices were artificially low by fiat (i.e. high prices were outlawed). Soviet citizens waited in line (or "queued") for various price-controlled goods and services such as cars, apartments, or some types of clothing. From the point of view of those waiting in line, such goods were in perpetual "short supply"; some of them were willing and able to pay more than the official price ceiling, but were legally prohibited from doing so. This method for determining the allocation of goods in short supply is known as "rationing".

* In the United States one of the most extreme examples of economic shortages are those caused by price ceilings on recreational drugs such as cocaine, heroin, and marijuana. Government enforced prohibition effectively establishes a price ceiling of zero; it is illegal to buy or sell these goods at any price. At the legally enforced price of zero, consumers face a shortage of legal cocaine. They opt for legal cocaine's best substitute, illegal cocaine, and resort to illegal transactions at prices higher than the ceiling. The shortage in this case prevails only within the legal market; the black market in fact clears at black market prices.

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