In one of my first economics posts, I discussed the classic law of supply and demand. In this post I am going to comment on the effect of artificial limits on supply as a cause of higher prices.
Some limits on supply are natural; there are just so many (or is just so much) of the good or service in the world. gold and diamonds are naturally rare, therefore valuable.
But there are other limits on supply that are artificial, usually a a result of a limitation imposed by the government.
The government-imposed limitation may be directly intended to reduce supply, such as liquor licenses or taxicab medallions, which in themselves become valuable economic goods. Historically, agricultural prices have been supported by requiring a specific allotment to grow certain crops (such as tobacco) or actually paying some farmers not to grow certain crops.
Intellectual property protections, like copyrights and patents, are intended to encourage “science and the useful arts” by assuring the author or inventor a time-limited monopoly. Such limits do, and in part are intended, to result in higher prices than if such protections did not exist.
The limitations may be for another purpose, such as quality assurance; for example, professional licenses usually require particular educational achievements and/or passing a licensing exam. Even where the limit serves such a quality-assurance purpose, the particular requirements might be adjusted to serve a price support purpose.
Jay Bohn
August 12, 2021
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