Price Fixing

The reasons price-fixing cannot work are relatively straightforward. Once any commodity is priced below the market, whether by government fiat or some other means, two things happen. First, the demand for that commodity increases. This is because, since the commodity is cheaper, people will buy, and can afford to buy, more of it. The second consequence, which follows from the first, is that the increased demand leads to a shortage of the commodity. The irony here is that it is a shortage of construction materials which has led the Government to make this proposal.

And, when a shortage occurs, a government may have to ration the product. But, if one product is rationed, and the populace has excess purchasing power, then people start buying other products — which creates a domino effect of shortages, as well as putting inflationary pressure on the economy.

It seems that the Government’s economic advisers are quite aware of these consequences, and plan to offset them by opening the domestic market to imports of steel, aggregate and cement. The CEO of Trinidad Cement Limited, Dr Rollins Bertrand, while describing the price control proposal as “surprising”, noted that competition is welcome once fair trade practices are followed. But, if the Government is planning to remove tariffs on imported construction materials, then why should there be any need for price-fixing? If the imported materials are cheaper, then local producers will be forced to reduce their prices in order to match the costs of the imports. And, if the idea is to fix local materials below that of imported ones, then the Government is in effect limiting the profits of the local producers of these materials. What usually happens in that situation is that either the producer goes out of business or the Government begins subsidising the product. In either case, the economic effects are deleterious.

The only reason that this two-pronged approach may be efficacious, at least in the short-term, is because the consequences can be financed by energy sector profits. But that only adds a hidden cost to Government expenditure, particularly in the construction sector — and it is Government’s mega-projects which, to a great extent, have both driven up the cost of construction materials and led to a shortage.

Indeed, the Government seems adamant in ignoring the basic cause for price increases — a scarcity of goods or a surplus of money. In Trinidad and Tobago’s booming energy economy at this time, it would appear that the latter is a key factor in driving prices up.

If this is so, then the real solution is for the Government to stop spending so much. Unfortunately, this is one option that the Patrick Manning administration is unlikely to even consider.