The Financial Express

Onion shortage and market failure

Published: December 12, 2019 21:26:34

Onion shortage and market failure

Onion price spirals have been a cri de coeur for quite some time from all quarters. The persistence of price spirals and unabated price hike of onions has increasingly becoming an obvious fallout of what we in economics call a market failure.

Market failure is an economic term that references a situation where, in any given market, there is a mismatch of supply and demand due to factors spawned from a lack of ideal market conditions (called externalities, such as syndicates, hoarders, etc). In such a situation, operation of non-market institutions such as government intervention would appear more efficient and welfare-enhancing than market solutions.

Obviously, market failures have adverse effects on the economy because production will be driven by sub-optimal resource allocations. That is, the social costs of producing the goods or services are not minimised, resulting in a waste of some resources. Hence, inefficiency in productions and distributions creep in. There are essentially two foremost reasons why markets fail:

l Inadequate reflection of costs or benefits in prices and thus into microeconomic decision-making in markets.

l Sub-optimal (that is, non-competitive market behaviour like monopoly, oligopoly, etc.) market structures.

The incidence of a market failure in any economic activity is often advanced as an argument to disavow that activity in question from being influenced by market forces. This usually leads to a discourse on the question of what -- if anything -- should be instituted to replace markets. The most common recourse to a market failure is government intervention to produce or supply certain goods and services. However, government intervention may cause non-market failure but the intervention itself, if done improperly and prolonged, might give way to negative externalities.

The on-going market intervention by the government to import onions and some other daily consumables are laudable measures to bring some relief from the scourge of shortage (caused artificial or man-made) and price spikes. Such interventions act as government initiated positive externalities. For example, government's move to limit hoarding and storing time for selected consumer essentials is intended to smooth out supply-demand imbalances and thus eliminate sudden price spikes. Government interventions may bring some short-term relief from price spirals to the detriment of long-term prospects of the free market price behaviour. Only the business community can shorten government intervention and institute market discipline by rooting out all non-market forces to their own long-term benefits.

In a market economy it is the government's responsibility to see that markets function efficiently and that the playing field is level for all participants. This requires mobility in the factors of production, free flow of information regarding prices and technology, and competition among buyers (for outputs) and sellers (for inputs). The free media also has a great role to play in information gathering and disseminating to all stakeholders.

Make no mistake, market regulation is not about price control -- it is to ensure that the operating rules do not discriminate individual participants or interest groups based on political affiliations, ethnicities, and religious bias. Under competition, prices are always subject to change based upon market forces and the interaction between buyers and sellers. This price movements and the degree of the consequent change in demand and supply is known as price elasticity.

Factors which effect supply elasticity are: price, resource costs, technology, competing products (substitutes), profit expectations, number of sellers, natural events, taxes, subsidies and government regulations, overproduction, inability to produce an item, and scarcity of natural resources. Understandably, some of these factors can be influenced by policy makers to improve supply conditions and the government should pursue them in earnest.

We know that prices are the precursors to everything that happens in a market economy. Today's shortages, and price spirals of daily essentials, may become the caveat for tomorrow's surplus productions and price deflations. Because, the market process will attract resources and entrepreneurs to the production of the goods which experienced shortages and unusual price spirals.

Who made the country perennially dependent on onion imports from India year after year? Why the agricultural planners have been failing to encourage domestic production to match supply and demand for onions barring weather related production constraints? This season, it is onion, next season it could be some other "must have" produce and the cycle of market failure will go round and round to the detriment of consumers and elation of the hoarders until the planners have their supply-demand models (production and distribution) appropriately updated and calibrated to changing parameters of time and growing demand.

Domestic production of any commodity must be attuned to ever increasing demand with growing population and producers must not be frustrated by lack of supply of quality inputs. Producers must earn their fair prices for their produce free of non-market forces. This should be the rule of operation in the production and distribution of all goods and services. It is not that the authorities do not know all these prerequisites to thwart a market failure, what is absent though is lack of adherence and enforcement.

In his December 02 article in this paper MS Siddiqui wrote, "Bangladesh's policymakers believe the price hike of onion was an irrational act, orchestrated by a market syndicate. The National Board of Revenue (NBR) claimed to have information about imported onions being hoarded illegally to create an artificial market crisis. Allegations of money-laundering in the name of onion imports were also there. The NBR chairman claimed that the onion stock in the country was enough and there was no rationale for such a crisis".

It seems - given the information as quoted are true - onion shortage is not simply a supply and demand mismatch - it is a microcosm of the failure of government machineries to facilitate and enforce smooth operations of the broader private economy. For example, banks' lending to low credit worthy borrowers resulting in massive non-performing loans, unabated loan defaults, bank looting, high lending interest rates, stock market manipulations, and so on are all market failures in various disguises These maladies of market imperfections are bound to continue or repeat unless the rules of operations are facilitated and enforced to the letter and spirit of the free market economy.

Government has no business in procuring and selling consumer goods at fair prices or any prices or even giving away free. Government's job is to facilitate the parameters of the market operations. What to produce, how much to produce, for whom to produce, and what price to charge are the decisions of the private sector embodied in the paradigm of market economy. Unless business communities comprehend this archetype and direct their concerted efforts to steer clear of market manipulators and other frictions, realization of free market discipline will remain a far cry.

Dr. Abdullah A Dewan, formerly a physicist and a nuclear engineer at BAEC, is professor of economics at Eastern Michigan University, USA.


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