, like everything else, is a balancing act. Outside of the mechanical forces of supply and demand
, human motivations and actions will affect the market. These must also be balanced with each other.
A basic force built into most corporations today is the necessity to maximize short-term profit
at the expense of long-term financial health. If an executive's quarterly balance sheet doesn't please stockholder
es will be cut back, or people will be passed over for promotion
, or people will be fired
Some goods and services are necessities to consumers; if their price increases, they will cut back on the consumption of other goods and services that may not be immediately necessary, but make their lives more efficient.
Producers have the power to cut back production at any time and create an artificial shortage
. The 'equlibrium point' for the product's price will increase to meet the shortage if the need for the good is great enough, but since the producer's costs are the same, any price increase is pure profit. Any market inefficiency comes at the expense of the consumer, and any deadweight loss
at the expense of consumers and other producers.
In the long term, of course, the producer may lose. But the market does not act immediately, and by the time the balance comes due, the executive will have his or her bonus, and may even have left the company for greener pastures.
In such cases, it may be prudent for a government to step in and set a price ceiling, in order to force the producer's unit profit down, and induce the producer to increase production to a reasonable level. Sometimes, more punitive measures may be called for. Other times, a price ceiling may be the worst possible action.
Any conclusion that a government-induced price ceiling will create market inefficiency is founded on a basic assumption, that a shortage in the supply of a good or service is created by the market, and not by a producer manipulating the market. This assumption is founded on a further assumption, that producers always act in good faith
, that their profit always contributes to market efficiency. This is often a bad assumption