Scarcity Versus Shortage

In order to demonstrate in a different way the crucial distinction between an increased scarcity-where fewer goods are available relative to the population-and a "shortage" as a price phenomenon, we can consider a situation where the actual amount of housing suddenly declined in a given area without any price control. This happened in the wake of the great San Francisco earthquake and fire of 1906. More than half the city's housing supply was destroyed during that catastrophe in just three days and not a single major hotel remained standing. Yet there was no housing shortage. When the San Francisco Chronicle resumed publication a month after the earthquake, its first issue contained 64 advertisements of apartments or homes for rent, compared to only 5 ads from people seeking apartments to live in.

Of the 200,000 people suddenly made homeless by the earthquake, temporary shelters housed 30,000 and an estimated 75,000 left the city. Still, that left nearly 100,000 people to be absorbed into the local housing market.

Yet the newspapers of that time mention no housing shortage. Rising prices not only allocated the existing housing, they provided incentives for rebuilding. In short, just as there can be a shortage without any greater physical scarcity, so there can be a greater physical scarcity without any shortage. People made homeless by the San Francisco earthquake found housing more readily than people made homeless by New York's rent control laws that took thousands of buildings off the market.

Similar economic principles apply in other markets. During the American gasoline "crisis" of 1972 and 1973, when oil prices were kept artificially low by the federal government, there were long lines of automobiles waiting at filling stations in cities across the United States, but there was in fact 95 percent as much gasoline sold in 1972 as there was in the previous year, when there were no gasoline lines at the filling stations, no shortage and no crisis atmosphere. Similarly, during the gasoline crisis of 1979, the amount of gasoline sold was only 3.5 percent less than in the record-breaking year of gasoline sales in 1978. In fact, the amount of gasoline sold in 1979 was greater than the gasoline consumption in any other previous year in the history of the country except 1978. In short, there was a minor increase in scarcity but a major shortage, with long lines of motorists waiting at filling stations, sometimes for hours, before reaching the pump.

The usual function of prices in directing goods and resources to where they are most in demand no longer operates under price controls, so that gasoline remained in short supply in many cities, even though it was more available in various communities to which people were driving less, such as rural or recreational areas. With prices being frozen in both places, there was little or no incentive to move the gasoline from one area to another, as would normally happen with free market prices responding to supply and demand.

Commenting on the unusual 1979 gasoline shortages in the United States, two Soviet economists pointed out an analogy with what happened regularly in the government-controlled economy of the Soviet Union:

In an economy with rigidly planned proportions, such situations are not the exception but the rule-an everyday reality, a governing law. The absolute majority of goods is either in short supply or in surplus. Quite often the same product is in both categories-there is a shortage in one region and a surplus in another.

In a free market, supply and demand would cause prices to rise where goods are in short supply and fall where they are abundant, providing incentives to move things from regions where there is a surplus to regions where there is a shortage. But where prices are fixed by law, no such price movements occur and there is no incentive to move goods between the two regions. Theoretically, a government planning commission could either issue orders to move these goods or change the prices to provide incentives for others to move them. In reality, Soviet planning commissions were overwhelmed by having to set more than 20 million prices and could hardly respond as quickly as a market where prices fluctuate freely by supply and demand. The U.S. government, with much less experience trying to manage an economy, was even less able to micro-manage the gasoline market.

Just as price controls on apartments cause a cutback in painting, maintenance, and other auxiliary services that go with apartments, so price controls on gasoline led to a cutback on the hours that filling stations remained open for their customers' convenience. Because of the long lines of automobiles waiting to buy gasoline during the shortage, filling stations could sell gas continuously for a relatively few hours and then shut down for the day, instead of having to stay open around the clock to dispense the same amount of gasoline at a normal pace, with cars stopping in at whatever times were convenient to the motorists. In New York City, for example, the average filling station was open 110 hours a week in September 1978, before the shortage, but only 27 hours a week in June 1979, during the shortage. Yet the total amount of gasoline pumped differed by only a few percentage points between these two periods.

In short, the problem was not a substantially greater physical scarcity, but a shortage at artificially low prices. Shortages mean that the seller no longer has to please the buyer. That is why landlords can let maintenance and other services deteriorate under rent control. In this case, the filling station owners could save on the time during which they had to pay for electricity and other costs of remaining open long hours. No doubt many or most of the motorists whose daily lives and work were disrupted by having to spend hours waiting in line behind other cars at filling stations would gladly have paid a few cents more per gallon of gasoline, in order to avoid such problems and stresses. But price control prevents buyers and sellers from making mutually advantageous transactions on terms different from those specified in the law.

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