Yesterday, we told you about the surplus of labour that occurs when wages are held above the equilibrium. The effect of an effective minimum wage is guaranteed unemployment.
Today, we find an article from the Globe and Mail that tells us that several companies in China have to shut down operations due to a lack of electricity. (Click here for article). It seems that the central government in Beijing has mandated energy savings and the easiest way to do this is to actually turn the power off for short periods of time, region by region. This is known as "rolling blackouts". It is more efficient because "brownouts", a situation where power is reduced everywhere, because some electrical components don't work at all with reduced power and others can be damaged.
The problem with rolling blackouts is that some production processes cannot be stopped and started that easily. The example used in the article is the steel industry. In this case, the local governments have shut down the facilities completely, reducing output and laying off workers.
There is a much better solution to China's problem. We call it a free market. When prices are free to fluctuate, they will equate the quantity supplied with the quantity demanded. There can be no shortage and no surplus. The shortage of electricity in China is not caused by the rapid economic growth, it is caused by an electricity price that is set below the equilibrium price.
China is not the only country that attempts to control prices. An article from the BBC shows what is happening with food prices in Mozambique. (Click here for article). Wheat prices are rising, yet if the government attempts to hold prices down, shortages will occur. Better to let wheat prices climb and have people switch to alternatives.
One reason that we study history is so we don't make the same mistake twice. Check this article from CNET news dated January 17, 2001. China is repeating the mistake made by California 10 years ago.
Subscribe to:
Post Comments (Atom)
Wasn't the energy market also being manipulated by Enron to artificially inflate prices as high as possible by purposefully reducing supply? I've seen the documentary "Enron: The Smartest Guys in the Room" and it explores the effects Enron had on the newly-deregulated energy markets in California: massive price surges, lowered supply, massive layoffs, and lost pension funds.
ReplyDeleteSpot prices rose as a result of the shortage. Companies like BC's Powerex took advantage of this by selling into the California market when prices were high. The price control only applied to producers in California. Enron was buying in CA and selling out of state, then buying out of state and selling into CA. They, and everyone else that did this lost in a suit brought by the State of California. Only Powerex was found not guilty.
ReplyDelete