Thursday, September 15, 2005

Another one for the principles class 

When I'm asked what the most important concept in economics is, most people expect me to say supply and demand. I actually answer comparative advantage. But then comes supply and demand, and nothing illustrates that better than showing examples of where governments try to avoid the market as the mechanism for rationing goods and services. One I'll use this term is the story of Indonesia's energy policy put up today by the Mises Institute. Indonesia is spending $522 per person this year to impose a price ceiling on gasoline and other fuels -- this in a country with per capita income of $810.

One might wonder why they do this. The article's author, K.Y. Leong, makes a compelling argument that this is part of the Suharto legacy.
For example, there are no less than five toll-collection points between Jarkarta�s city centre and the international airport (about an hour�s drive), all owned and operated by the sons & daughter of the ex-Indonesian President Suharto. All car distribution businesses and assembly plants are either owned directly by the members of the Suharto family or in partnership with foreign investors. Again it is in their interest to encourage car ownership and usage. They couldn�t and wouldn�t give gasoline away, so the next best thing was to strong-arm the government into a costly subsidy scheme. Thus, the government�s predicament today.
Private toll booths. Now that's an economics story!

UPDATE: Phil Miller weighs in:
...if it weren't necessary for students to have been exposed to the concept of opportunity cost before they learn about comparative advantage, I'd teach opportunity cost second.
Exactly so.