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Economics/Bribery vs. Waiting in Line

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Question
Dear Professor,

I am currently reading about price ceilings, where the maximum price that can be legally charged is below the market price. Imposition of price ceilings will induce bribery and corruption due to shortages where quantity demanded exceeds the quantity supplied. Price ceilings also cause a wait in line which lead to something called time costs (total value of wasted time). The difference between paying in price and paying in time is that paying in time is much more wasteful as it is simply lost. However, for the case of bribery, the supplier receives the bribe from the customer. So, it is less wasteful in a sense that the supplier receives the money instead of nothing (waiting in line). My question is, does allocation by bribery result in a bigger total economic surplus than allocation by waiting in line and why? I was thinking that it would be bigger because there would be a higher consumer surplus than waiting in line (I might be wrong) and  

total economic surplus= consumer surplus+ producer surplus.

I was also thinking that bribery actually has a better welfare consequence because the bribe money can actually be used for other purposes instead of waiting in line where time is simply lost. Thank you for time professor.

Regards,
Justin

Answer
Maximum Price
Maximum Price  

Price Ceiling and Welfare
Price Ceiling and Welf  
Dear Justin,

You deserve my commendation:  you have, so to speak, struck upon a maverick proposition. This is particularly so because you have boldly suggested an effectual alternative to what has continued to show up as an oft-observed misfired outcome of market intervention. To be sure, your suggestion, valid in the context of maximization of welfare, is quite in line with the seminal interventionist policy initiative that has of late surfaced on the corruption-riddled economic landscape. This dissenting policy initiative, so far shrugged off by mainstream economic gurus as an ethically unacceptable method to deal with an intractable economic evil, is nonetheless gaining momentum because top policy-makers, even on U.S. soil, support it on the ground that – all socioeconomic and ethical considerations taken in the lump— bribery intended to put the lid on waste goes to outweigh all the odds against either price ceiling or predatory price hikes.  Let’s have a hard look at it.

First, as you well know, price ceiling – the maximum legal price a seller may charge for a commodity –is a market intervention purportedly to enable consumers to obtain some essential commodity that they cannot afford at the equilibrium price. There is a good ethical side to it.

The problem, however, is: as you have also stated in your question, low price whets demand and crimps supply, because buyers can afford more but sellers find sales less lucrative. The excess of demand over supply, in absence of price ceiling, would make many buyers scramble for fewer goods and services. They would bid price up. This rise in price drives away some buyers since their marginal utilities as a result become negative; on the other hand, this rise in price encourages more production and sales since some sellers who couldn’t previously make profit can now make profit. The two-pronged forces are set in motion, and over time, through a cobweb process [which could be shown in advanced theory with dynamical solutions to difference equations in supply and demand functions], a new equilibrium is reached with a larger equilibrium quantity at higher market price.

THE INITIAL SITUATION: RATIONALE FOR IMPOSITION OF PRICE CEILING
Suppose world income boosts the purchase of automobiles and shifts the demand curve for gasoline to the right. This causes equilibrium quantity Q to increase and, simultaneously, price P of gasoline to rise. There may be market failure: households can’t now afford to buy gasoline.

EXPLANATION: ATTACHMENT –I
Consumer surplus in this situation is the rust-coloured triangle above the market price line (which shows the market-clearing price) and below the demand curve. Now, as people demand that the government “do something,” the government must come to the fore.  To remedy this problem –i.e., to enable households to have gas at affordable price –the government imposes a “maximum price” above which sale of gas would be illegal. Look at Attachment-I. Maximum price is set below market price. The reason is to divert “undeserved” BLUE PRODUCER SURPLUS to RUST-COLOURED CONSUMER SURPLUS.  Good intention, to be sure.

EXPLANATION: ATTACHMENT II AND ATTACHMENT III
In presence of price ceiling, which is designed to give succor to buyers who can’t afford the essential commodity at high price, no price higher than the ceiling price can be charged. As a result, excess demand exists. There will be two possible outcomes:

•   The Desirable Outcome. Refer to Attachment II. Demand will extend. Supply should also increase to meet the excess demand, though there would be no increase in price as sellers can’t increase price legally. More sales, lower price. Consumer surplus increases by an amount given by the area of the green trapezoid. So consumer surplus swells to the enlarged rust-and-green triangle. Demand met, intervention works. This is just one will-‘o-the- wisp ideal situation.

•   The Undesirable Outcome.  Refer to Attachment III. The above hypothetical, ideal situation unfortunately doesn’t obtain. Economic variables and parameters intertwine in such a manner that supply doesn’t meet demand, and excess demand results. Supply contracts and demand extends. Many households have to do away with necessary commuting. Less gasoline is sold at lower price. Both the buyers and letters lose.

•   To ensure this desirable outcome, since excess demand will inexorably result from intervention, the government may take recourse to forestall emergence of black market and to quell consumers’ grumblings by relying on a system of rationing. The government may as well do that by buying the goods in bulks and then selling, or the government may even import that good to meet the unmet demand by selling through rationing. This, of course, causes lines and waiting.

•   Memories of waiting in line and wasting time for purchase of gas are still fresh in North American history. Time is a commodity, and long lines create welfare loss.
 
•   The yellow and the pink triangles show reduction of consumer surplus and reduction of production surplus, respectively. These losses are called deadweight losses, because they evaporate into thin air.

EXPLANATION: ATTACHMENT IV
•   Look at Attachment III. The RED TRIANGLE sums up the consumer surplus loss and the producer surplus loss. This deadweight loss is society’s total welfare loss due to imposition of price ceiling. The interventionist policy of the government to “do something” for the benefit of the consumers has backfired.

THE LAX-INTERVENTION EPIPHANY: ATTACHMENT V
•   Attachment III brings about the illustration of the newfangled second-best solution to the problem of market failure caused by unaffordable prices. This is going to justify the proposition we started with.

•   Let a doctor totally prohibit alcohol consumption for his alcoholic patient, and the patient zooms into a pitiable state of health degeneration with sudden withdrawal syndrome. The patient had better not consulted the doctor. Should the doctor be judicious, he would allow the patient to quaff drinks in dribbles and finally recover. Quite the same, too much oversight and strictness would ultimately stifle the restoration mechanism of market, and there would be deadweight loss to the society.

•   Of late, government of different countries have realized that some sort of corruption may be allowed so as to let the wheels of economic growth roll unhindered. Indonesia is a prime example.

•   U.S. government wanted to prohibit alcohol, but that led to gangsterism and speakeasies and bootlegging, though Coca Cola Co. benefited. U.S. government had to repeal the act. You are also aware that recently U.S. government seriously considered legalizing drug from Mexico in that the government would get revenue and that, when restrictions are relaxed, cravings reduce. This proves that all policies directed towards ideal goodness may not work. Price ceiling is just one such policy. The same applies to allowing bribery when price ceiling in its most pristine form does more bad than good.

•   True, bribery is not to be encouraged. However, if bribery can reduce deadweight loss to the society, even if inflicting some wrongs, then if the wrongs inflicted are sufficiently outweighed by bribery, then BRIBERY WITH PRICE CEILING is certainly more paying than NO BRIBERY AND PRICE CEILING. How?

•   Look at Attachment V. If bribery is allowed, you are right the supplier received the money from the buyers. In a way this is incentive of higher price “in the form of bribe” to coax the seller into supplying more. The smell of dollar bills is the same, whether coming from a crook or from a saint. This is just money. You are also right that time is what actually should be considered a commodity –we are paid for the hours we put in, industries produce over time, fruits sprout and ripen over time. If time is wasted –i.e., not utilized either in any gainful employment or in leisure which also gives utility –that indeed is tantamount to deadweight loss.

•   The attachment shows that bribery in the garb of “extra” payment for the commodity PUSHES the legal black price line in the diagram upward and parallel to an “amorphous blue line.”

•   This is not given in any textbook, so far as I know. So I would rather give it a name, “bribe-loaded price line,” and I would impart an “amorphous character” to it because this is both illegal and tenuously dependent on unpredictable demand-and-supply situation. The attachment gives a green bribe-loaded line above the maximum-price line. The intersection of the demand curve with the bribe-loaded line determines the "bribery-triggered equilibrium output" which is greater than "no-bribery interventionist output." As you can also see, total welfare with bribery is greater than total welfare with no bribery. The deadweight-loss triangle has SHRUNK.

I hope, Justin, this gives a full-dress analysis of the prposition you have proffered. Let me tell you, again, the most exhilarating part of your query is that you are not complacent with the run-of-the-mill platter of economic ideas.  

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Eklimur Raza

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It appears some students in this website are confused about elasticity of demand and the slope of the demand curve when they are trying to figure out why rectangular hyperbola comes up in case of unitary demand curve. First, they don't know that RH can be depicted in a positive quadrant of price,quantity plane. Secondly, they make the mistake that the slope of RH is constant at -1. Two points could help them: first, e=1 at each and every point of the RH, because the tangent at any point shows lower segment=upper segment (another geometric definition of e); yet slopes at different points,dQ/dP, are different; second, e is not slope but [(Slope)(P/Q)]in absolute terms. Caveat: only if we measure (log P) along the horizontal axis and (log Q) up the vertical axis, can we then say slope equals elasticity --in which case RH on P,Q plane is transformed into a straight-line demand curve [with slope= -tan 45 deg] on (log Q),(logP) plane, and e= -d(log Q)/d(log P). [By the way, logs are not used in college textbooks --although that is helpful in econometric estimation of elasticity viewed as an exponent of P, when demand equation is transformed into log-linear form.] I have not found the geometrical explanation I have given in any textbook followed in undergraduate and college classes in Canada (including the book followed in a university where I taught for a short time and in the book followed in George Brown College, Toronto, where I teach.

Experience

About 11 years' teaching economics and business studies, and also English, history and elementary French.Practical experience in a development bank, working with international donor agencies like the World Bank and the ADB. Experience in free-lance journalism, including Canada's "National Post."

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I teach micro- and macroeconomics at George Brown College (continuing education), Toronto, ON, Canada.

Publications
Many articles and editorials, on different subjects, in English newspapers. Recently an applied Major Research Paper, based on a synthesis of the Solow growth model and the Lewis two-sector model, has be accepted by Ryerson University, Toronto. Professors Thomas Barbiero and Eric Cam, Ryerson University, accepted the paper.

Education/Credentials
Master degree in Interantional Economics and Finance and diploma with honours in Business Administration from Canada.

Awards and Honors
Received First Prize in an inter-university Literary Contest.

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