Sunday, April 3, 2011

Subsidy through mandatory oil price discounts will not work

Anybody with knowledge of economics101 knows that price controls create shortages by pushing the price below the point where supply and demand meet. Price controls also discourage production by reducing profit margins, even wiping them out. Marginal producers are likely to go out of business because of lower profit margins than well established firms. So when it comes to the oil industry, one can't cry oligopoly whilst supporting price controls.

Subsidization of an interest group, such as drivers of Public Utility Vehicles (PUVs), by forcing gas stations to give discounts also has the effect of disrupting the price mechanism. But in this case the market still has the opportunity to prevent shortages by charging higher prices to consumers not given a discount. There is no such thing as a free lunch. Government intervention to subsidize one interest group, PUV drivers, can only be possible at the expense of those not included in that interest group, everybody else who buys gas.

Some would argue that mandatory discounts are only fair. After all, PUV drivers are at the lower rung of the income bracket. Moreover, most individuals who use PUVs to travel are also part of the lower income bracket. Mandatory discounts at the gas station would remove the need to raise transportation fares, and in effect subsidize consumers.

But if poverty justified economic subsidization then we would also need to pass legislation to give the poor discounts in buying food, medicine, clothes, etc. But we do not give mandatory discounts to the poor even in these basic necessities. Even scholarships and other financial subsidies in universities are not given solely on the basis of poverty, but on academic merit. And there is a lesson to be learned here. In a free society, poverty is only a stage in life. Each person is born under unique circumstances and some may be considered more permanent than others, but individuals are largely placed in their 'proper' role in society by the time they reach middle age. By then, poor people are poor because of only three reasons:

1. Incompetence, laziness, antisocial behavior resulting in low productivity
2. Contentment with current financial condition
3. Injustice caused by government (e.g. minimum wage, taxes, inflation)

If poor who fall into category 1 are subsidized, then the ills associated with them will also be subsidized and society will have more incompetence, laziness and antisocial behavior. If the poor who fall into category two are subsidized, then this will amount to minding of other peoples' lives and presuming to know what's best. The poor who fall into category 3 should be helped by repealing legislation such as the minimum wage. It is clear that government intervention should not be used in all three counts. The simple fact is, if the poor had the same material standard of living as the rich, then no one would want to be rich. In other words, no one would have the incentive to work hard and produce for his fellow man. Both theory and history teach us that the result of egalitarianism is a Soviet economy where the only incentive to work is fear of death and torture. (Socialism cannot 'work' w/o killing fields, this is something the Leninists knew that the social democrats still haven't learned)

Let's go back to the main issue of mandatory gas price discounts for PUV drivers/operators. Some would still support such legislation not because PUV drivers are poor, but because their fuel cost increase makes them the most affected among the poor. But this is only because of standardized transportation fares. Without government standardization, drivers would be able to raise transportation fares to a level where profit margins are not much reduced (if not for increase in gas prices). Freedom of individual PUV drivers to set fares would remove their being a 'special' case among the poor and make mandatory gas price discounts unjustified.

Non-subsidization of PUV drivers and removal of standardized fares will prevent further problems but it will not solve the main problem of higher gas prices. The solution lies in economic freedom. Cut taxes, remove regulations, lower tariffs, abolish licensing. That's only the tip of the iceberg. More ambitious would be to stop the war in the Middle East, outlaw fractional reserve banking, and de-socialize public land for purposes of oil drilling. Lower prices can only come about via increased supply and stable currency. All the aforementioned government interventions discourage production either directly or indirectly and hence should be abolished. Freedom is always the solution, always.

There are of course some people who's ideas, if followed, assure not only increased costs but destruction of the social order itself.

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