Con­trols a recipe for disas­ter

The Witness - - OPINION - Martin van Staden • Martin van Staden is le­gal re­searcher at the Free Mar­ket Foun­da­tion and is pur­su­ing a master of laws at the Univer­sity of Pre­to­ria.

THE Depart­ment of En­ergy has in­di­cated that it is con­sid­er­ing set­ting a max­i­mum al­low­able price for 93 un­leaded fuel as a re­lief mea­sure to soothe South Africans be­lea­guered by un­re­lent­ing petrol price in­creases over re­cent months. A warn­ing though — price con­trols con­sis­tently lead to un­in­tended con­se­quences far worse than the prob­lems they are sup­posed to fix.

The fuel price in South Africa is al­ready con­trolled. Our fuel price dif­fers only be­tween the coastal and in­land prov­inces. In other coun­tries, you can pay a dif­fer­ent, of­ten lower price, at every fuel sta­tion you visit be­cause they leave it to the mar­ket to de­ter­mine the price of petrol, in­stead of leav­ing it to the gov­ern­ment.

Gen­er­ally, the gov­ern­ment raises (and more rarely, low­ers) the fuel price based on what it of­ten er­rantly thinks the mar­ket wants. If, how­ever, the gov­ern­ment goes ahead and im­ple­ments a regime whereby 93 oc­tane petrol will no longer be al­lowed to go beyond a cer­tain price, it will dis­tort the mar­ket even more than it is now.

A price is not only a guide in mea­sur­ing the value of a prod­uct, it is also a sig­nal, ar­guably the most im­por­tant sig­nal in any mod­ern econ­omy, of the scale of de­mand. When a sought-af­ter prod­uct has a low price, it is the price that in­di­cates to con­sumers that there is a large sup­ply of that prod­uct and that they can buy it in vast quan­ti­ties. When it has a high price, con­sumers are told that there is a limited sup­ply, and that they should be con­ser­va­tive when pur­chas­ing it. This is how a mar­ket deals with re­source scarcity: com­par­a­tively scarce re­sources are more ex­pen­sive, and com­par­a­tively abun­dant re­sources are cheaper.

As econ­o­mist Lud­wig von Mises wrote: “The gov­ern­ment’s in­ter­fer­ence with the price of a com­mod­ity re­stricts the sup­ply avail­able for con­sump­tion. This out­come is con­trary to the in­ten­tions which mo­ti­vated the price ceil­ing.”

Von Mises added: “The gov­ern­ment wanted to make it eas­ier for peo­ple to ob­tain the ar­ti­cle con­cerned. But its in­ter­ven­tion re­sults in shrink­ing of the sup­ply pro­duced and of­fered for sale.”

Price con­trols in­ter­fere in this price mech­a­nism of the mar­ket. While we might wish scarce goods were more af­ford­able, the fact is that the mar­ket is warn­ing us that if we buy that prod­uct too lib­er­ally, a short­age will re­sult. The higher price forces us to think twice. When the gov­ern­ment as an un­pro­duc­tive non-eco­nomic ac­tor steps in and forces a price floor or price ceil­ing, the mar­ket is no longer ca­pa­ble of send­ing rel­e­vant sig­nals to con­sumers. Thus, when cir­cum­stances in the Mid­dle East cause oil sup­plies to drop, or tran­spor­ta­tion to other re­gions to be more oner­ous, the price of fuel will be higher. With a price ceil­ing en­forced, the fuel we have will fly out of the pumps and even­tu­ally not be re­placed as the cost of new sup­plies will not have been cov­ered.

There is a way, how­ever, for the gov­ern­ment to re­duce the fuel price dras­ti­cally with­out in­ter­fer­ing in nec­es­sary mar­ket pro­cesses. Forty per­cent of what we now pay for fuel has noth­ing to do with fuel, and ev­ery­thing to do with pol­i­tics. The gen­eral fuel levy, os­ten­si­bly em­ployed to main­tain and build roads, and the Road Ac­ci­dent Fund levy, which funds a bank­rupt and col­laps­ing in­sti­tu­tion, are what make our fuel about R6,74 more ex­pen­sive than it should be. Thus, if the gov­ern­ment elim­i­nated these levies, we could be pay­ing R10,11 for a litre of 93 un­leaded right now, with no price con­trol needed.

But it is highly un­likely that the gov­ern­ment will elim­i­nate these levies. It seems the onus is only on us as cit­i­zens to “tighten our belts”, while the gov­ern­ment con­tin­ues to spend more and more of our money on an ever-grow­ing state bureau­cracy. Pres­i­dent Cyril Ramaphosa re­cently went as far as to an­nounce at the Jobs Sum­mit that there will be no job losses in the pub­lic sec­tor, at a time when our econ­omy des­per­ately needs a dras­ti­cally leaner pub­lic ser­vice.

South Africans should be care­ful about wel­com­ing more gov­ern­ment in­ter­ven­tion in the econ­omy when pro­posed in­ter­ven­tions are in fact aimed at cor­rect­ing a prob­lem caused by other gov­ern­ment in­ter­ven­tions. In­stead, we must in­sist that the gov­ern­ment re­move it­self from the econ­omy. A grow­ing, vi­brant and free econ­omy will be the in­evitable re­sult. — FMF.

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