Spitting on Marshall

Spitting on Marshall

In 1890, Alfred Marshall, whose contributions to Economics certainly should have won him the Nobel Prize in Economics (had it existed), published the influential Principles of Economics in which he introduces the concept of supply and demand, among other relevant economic concepts.

Today, about 121 years after Marshall introduced these simple and powerful concepts of supply and demand, Tanzania’s Energy & Water Utilities Regulatory Authority (EWURA), has recently issued a directive requiring fuel suppliers in the country to adhere to the following prices; TShs 2003.79 for Petrol, TShs 1910.84 for Diesel and TShs 1904.53 for Kerosene.  Please note that all these prices are prices at the pump and were effective from August 3rd.

Marshall’s brilliant supply & demand analysis would predict that imposing this artificial price, below the prevailing market price, would cause some suppliers to decrease supplying at this new price, and most importantly, would increase demand causing a net shortage of the commodity.  Well, abracadabra, Marshall’s magic is exactly what is going on right now in Dar es Salaam and throughout the country.

Some suppliers have refused to supply fuel at these new lower prices.  Demand has soared (or at the very least remained the same).  And the end result is that there exists a shortage of fuel.  Today’s Guardian newspaper ran this fuel crisis as its headline on its front page, noting that Mbeya faces the most acute shortages where many motorists have had to leave their cars at home.  In addition, this fuel shortage has not only affected the well-off in our society that have cars, but also those that use public transport (including yours truly).  Today’s Guardian goes on to report spikes in taxi fares as buses have become less frequent in almost all routes in Dar and thus demand for taxis having gone up.

An example of fuel shortage queues, this one from Zambia.

EWURA, of course, is not taking this lying down and has threatened that any fuel supplier who refuses to implement this directive will risk losing their licences to supply fuel in the country.  In this fight, although the government thinks they are Goliath, it is in fact the fuel operators who are Goliath and the government David.  And I do not think David will win this one.  In fact, closing down these fuel suppliers, will only shorten supply even further and create further uncertainty for business (not to mention for the common mwananchi).  Buses, finding it difficult to get fuel, will run less frequently, causing massive commuter problems, definitely raising dala dala fares (which also have a price ceiling imposed on them), taxi fares will go up further (as is the status quo), and might have far reaching consequences beyond the transport sector, to involve food distribution across the country among other critical sectors (not to mention fuel demand from those operating electric generators).

The sad part is that, Economic theory goes even further in its prediction of this doomsday scenario.  It predicts that a black market will emerge that will sell fuel to desperate consumers at prices relatively higher than those that prevailed in the market prior to this directive.  This will not only munch into bigger proportions of the mwananchi‘s disposable income, but also, cause budgetary strain on vyombo vya dola, whose job it will be to enforce this directive, at immense costs to the tax payer (as if taxes are not high enough).  This will lead into a downward spiral, the pits of which are bottomless and possibly lead into hell.

Okay.  Perhaps that last bit was a bit too dramatic.  However, as I have said once before on a piece written here, good intentions do not necessarily translate to good results.  The intention, of abating the mwananchi‘s fuel woes and thus easing the pinch on their wallet is certainly good and admirable.  Doing this via imposing arbitrary and lower prices than those that prevailed in the market ex ante of this directive, is not going to be successful.  What this will do is take us from a bad situation, to a disastrous one.  Recall US President Nixon’s imposition of price controls on August 15th, 1971, that were a monumental failure.

To conclude, it is now a bit over 19h00 in Dar es Salaam and I am going to stop writing this rant, and head out home from work.  I am, for once, not envious of those that have cars and commute to and from work.  Actually, on second thought, I fear the dala dala woes that await me out there, but hope that our policy makers re-consider their decision to spit on Alfred Marshall.  They should instead cede to the Law of Supply and Demand, just as we all adhere to the Laws of Physics in this, tiny physical world (and economic, arguably).

Constantine was born in Dar es Salaam and raised between Dar es Salaam, Nairobi and Lusaka. He received his Bachelor of Arts in Economics from Xavier University in Cincinnati, Ohio and his Master of Public Policy from the University of Chicago in Chicago, Illinois. He is also a World Economic Forum's Global Shaper of the Dar es Salaam Hub and recipient of the Center for Effective Global Action Visiting Fellowship and Catalyst Grant at the University of California at Berkeley. Constantine is currently working as the Senior Research Analyst at Twaweza and teaches, part-time, an introductory impact evaluation course at the University of Dar es Salaam's Economics Department. He was previously working as a Research Scientist at the Ifakara Health Institute. He continues to conduct research on various topics including identify the source of the price premium for unprotected sex, the determinants of support for the East African Federation by Tanzanian and Kenyan citizens, the political economy of election boycotts in Africa, carbon sequestration in Costa Rica, the economics of witchcraft and has general interests in development economics, human capital, game theory and political economy to mention but a few. Constantine intends to bring this experience to Vijana FM by discussing issues related to economic development, political economy, and human rights.

7 Comments

  1. Kondakta 6 years ago

    The fact is, two parties have made conscious decisions that they think is in their best interests, not to be a Marxist or anything.

    The first party is EWURA, whose intentions we can contemplate extensively, but who have essentially decided this fuel price ceiling is beneficial to the public in the long term.

    The second party are the fuel stations and owners of public transport vehicles, some of whom have decided that their profit margins do not allow them to work at the ceiling set by EWURA.

    I don’t think EWURA has shut down the fuel stations themselves as you say. The fuel stations have decided to shut down on their own.

  2. Author
    Constantine 6 years ago

    @Kondakta: I did not say that EWURA has shut down any fuel stations. I said that EWURA has threatened to cease licenses of those that do not supply fuel at this new price. And secondly, and most importantly, this was not a negotiated agreement. EWURA made this decision unilaterally having lowered the taxes on fuel, the government presumed (erroneously) that prices would fall. They neglected the fact that prices are not simply determined by supply but also by demand. If the government, vis-à-vis EWURA, truly wanted to lower prices they should do one of two things (or both): 1. Lower demand, either by restricting certain cars on the road, such as huge gas-guzzling land cruiser GX/VX and the like, or do some sort of odd-even plate number alternation as Beijing and other cities do, or simply require that people commute with other passengers, that is price discriminate against those that are driving by themselves by pricing them higher than those that have at least one passenger. 2. They should increase supply, by either entering this market directly, by importing their own fuel and flooding the market with this cheaper priced fuel, which would drive other suppliers to at the very least drop their prices (not necessarily to the current mandated level, but certainly lower than the prices the prevailed before), or by buying the fuel directly from the suppliers at whatever level price they want and reselling to the public and a cheaper level. Both these would minimize market intervention.
    So to summarize;
    I did not say EWURA has shut down any fuel stations. What I did say is that they have threatened to shut down any that refuse to adhere to this new directive.
    Secondly, an A level student (even at Form V) in Economics will tell you why this current scenario will not work. Additionally, that same student can easily suggest that the only ways to lower prices is by either lowering demand, or increasing supply or both. Basi.

  3. Roman 6 years ago

    An interesting analysis.
    There are a few other factors to consider though in this real world situation.

    A. At least some fuel suppliers are owned by government officials, creating a conflict of interest btwn making fuel costs more affordable and cutting into their own profits, and in TZ profits always win.

    B. Corruption, those that are not owned by government officials are either straight up bribing government officials or are major contributors to political parties, it is not in the government’s interest to see their profits reduced.

    C. Price fixing and collusion.
    Unless the new prices set by EWURA are bellow the costs of being in the fuel business then competition should have ensured that others pick up the slack of those who refuse to do business, this does not appear to be happening, fuel suppliers are engaged in illegal collusion to artificially inflate the cost of fuel and stifle the true competition. To see why this is allowed to continue see point A&B.

    All these things ensure that there is no true demand and supply at work in the Tanzania fuel market.

  4. Kondakta 6 years ago

    @Constantine perhaps I misunderstood you here: “In fact, closing down these fuel suppliers, will only shorten supply even further and create further uncertainty for business (not to mention for the common mwananchi).”

    To me that meant the people “closing down the fuel suppliers” was government and EWURA.

    @Roman you make some good points that I think, once again, point to Marx; people will follow self interest as the motivation to be involved in the means of production.

  5. Author
    Constantine 6 years ago

    @Roman: Valid points kabisa. However, if your points A and B were indeed the scenario that exists as the status quo currently, then these powers that be would have ensured that parliamentary pressure would have been insufficient to move EWURA to impose this fuel price. If indeed, as you say, some fuel stations are owned by some government officials and/or some fuel station owners (who are not government officials, I am assuming) bribe enforcing agents (presumably from EWURA and other vyombo vya dola), then again, this price ceiling would not have been effective and we would be seeing more fuel stations supplying at the old prices with impunity. This is not what we are observing. Either, the government officials who own these stations are not the “big fish” and are merely sardines and hence cannot affect public policy in their favor (in this case, the price ceiling, not being in their favor). Or, as I would love to hope, no one it seems in Tanzania is above the law, at least in this case and thus those government officials cannot once again prevent public policy that is detrimental to their profit-driven wants.

    Your most valid point (to which I concur) is the collusion argument. In the market for fuel, this is a huge problem. The world would be a better (and cheaper) place had there not existed the evil that is OPEC, the biggest colluding club of them all! So yes, if the oil suppliers in Tanzania are colluding to fix prices, then this is certainly a meddling into the market. Just as the price ceiling. So, the government should work to dismantle any collusion (if there is one) and thus allow for a competitive and free market. But, we do know (from Economic theory, once again) that a cartel faces many issues with policing itself. There is no guarantee that any member of the cartel will sell the product at below the cartel price. Bahrain for instance once threatened to sell oil beyond its quota (and this would have increased oil supply in the markets, causing lower prices for all oil suppliers) because it was facing financial difficulties. Saudi Arabia had to step in and cut its quota in exchange for Bahrain to increase its quota. So, I do agree that price collusion is a threat to Tanzania’s fuel market, but I do not think it is a big enough problem to affect market prices. In a colluding entity of Firm A, B, C and D in Tanzania, there is nothing to stop Firm D from selling more at whatever price it wants and undercut the “cartel” of Firms A, B and C. The same profit motive that would drive people to collude would be the same reason to undo the cartel. Think deeply about it and you will see this analysis is correct.

    Additionally, true demand in Tanzania certainly exists. Whenever I see the landcruisers, the nissans and the like, trust me, I know true fuel demand exists. Mitigating prices through demand might be another possible avenue. The government could do any of the following (and many other ways to curb demand);

    1. They could, as London does, impose a congestion tax going into downtown, that would force many to park outside the downtown zone and either commute by daladala/taxi/piki piki or walk to town.

    2. They could impose a price ceiling at the pump stations for anyone who has atleast one passenger at the pump (admittedly though, people might circumvent this by merely paying some desperado some few thousand shillings to “pose” as the passenger when at the pump! So we would need to devise a very clever-tamper-proof system. Suggestions on this are welcome).

    3. They could impose a price ceiling for those with smaller engine vehicles (this is certainly more tamper proof than 2).

    4. They could alternate access to the roads by odd-even number plates. This is the most draconian measure and my least favorite. However, it is not completely tamper-proof as people could buy odd and even plate numbers and simply change these plate numbers according to the day. This of course would be cumbersome and not many would try and do this. Dalalas and other business that rely on being on the road, will definitely find it worth while to do this, and so we would predict most violators to be these groups.

    5. Please suggest any other inventful ways as I would love to hear suggestions.

    @Kondakta: That makes the two of us. Because I am confused on what you are confused about! If I understood you correctly, then the answer is yes, the people who will possibly close down the fuel suppliers would be the government via its agency, EWURA. Mind you, the government seems to be losing the battle already. I recently travelled from Tanga to Arusha. It took us 45 minutes and several kilometres to get fuel. Once I got to the Ubungo bus station, and boarded a pikipiki to take me home, the pikipiki was out of fuel. The driver told me that he had just filled up at a fuelling station at Sinza (Big Oil I think he said it was) and he was thus puzzled that his tank was now empty. Big Oil, gave him little oil and in fact, they filled his tank na hewa tu. Very sad, but predictable whenever there is price restrictions in the market. People will do whatever it takes to avoid any restriction on their benefits. This morning, having woken up the usual time, I could not get public transport because there were less daladalas and pikipikis (my two frequent modes of transport). This led me to get to work a bit late. Kesho, I will wake up even earlier.

Pingbacks

  1. Lucky Number 13 4 years ago

    […] As a tax payer, I am encouraged by the news that fiscal policy drives economic growth, however, corruption and fiscal mismanagement are certainly stifling growth as well.  The pace of our growth in spite of this is testament to the resilience of the Tanzanian mwananchi.  I have no qualms with paying more taxes, so long as tax revenues are used as efficiently as possible in trying to better the typical Tanzanian.  In a recent employment move, yours truly has seen his gross salary rise by about 47%, but given the progressive nature our tax code, my net salary has only gone up by only 35%.  This translate to a marginal tax rate of about 82%, which in layman’s terms implies that the United Republic of Tanzania through its tax collector, TRA, are extracting 82 shillings for every extra 100 shillings I will make in my new position.  Now although I am not socialist like Ernesto “Che” Guevara, I do support taxes that help others less fortunate than myself live more fulfilling lives.  The caveat is that of course, my confidence in our government’s (any government’s, to be fair) ability to efficiently do this is quite low.  This is why I am pushing for greater private investment and enterprise.  And no, I am not convinced that a government run by the opposition, say CHADEMA, will do any better with my extra 82 shillings.  The ruling party and the main opposition party are simply zebras with spots and leopards with stripes, respectively.  And government almost always spits on Marshall. […]

  2. Shit Out Of Luck 4 years ago

    […] the way of too much and/or too complicated taxation. Because as we know, government almost always spits on Marshall, and price-fixing and arbitrarily deciding tax rates is never too high, too low, but just right, […]

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