How to Destroy Cartels

Cartels cut supply to raise prices

How can we destroy cartels in Pakistan? There is an enormous waste of resources by the government in an attempt to eradicate this parasite. So much time, effort, and money has been used to prevent this scrooge from taking hold. And yet, cartels continue to exist in Pakistan. The solution though is not so complicated as might appear from its longevity.

How do cartels form and what do they do to cause a rise in prices? Cartels raise their prices artificially by cutting supply to the domestic market. But how do we know that the raised price is higher than what it should be? We figure it out by looking at the world market prices for the same goods and services of course.

So what can we do instead of drafting legislation after legislation to punish those who end up forming cartels? Is there a solution out there that costs less, increases the quality of the product, breaks down cartels, and as a result ends up providing the needed resources in abundance? Oh, yes there is and I bet you’re going to love it! In order to destroy cartels we simply need to remove the barriers that prevent foreign goods from easily entering Pakistan.

The end result will be a glorious pouring in of cheaper goods, fulfilling all and every customer need while the prices fall. This drop in prices will force the cartels to bring their hoarded goods to the market increasing the supply and removing any shortages. Notice here that no bullet was fired, no legislation was created, no police was sent, no threat was issued, no court order was sought, and no monitoring was performed. The cartels weren’t even asked to stop hoarding the goods. The economic reality, and the self-interest to protect their assets simply guided the cartels into behaving in a manner that served the customer best. This is the invisible hand Adam Smith was talking about in his seminal work: The Wealth of Nations.

But you ask if the solution is so simple why hasn’t it been implemented? And I’ll answer: because the big government is in cahoots with cartels to suppress competition, especially foreign. They’ll use words such as job losses, unemployment, destruction of the economy, foreign conspiracy to take control of our assets, to fill your hearts with the dreaded fear of the unknown. All this to justify charging us a lot more for the same good. All this to stop the greedy capitalist from selling us the same good cheaper!

Now you know cartels exist only with the help of the government. In case of free markets and no restrictions, there isn’t much scope for these cartels to stand a chance of survival. When we hear of steel shortages, oil and gas shortages, food shortages, medicine shortages, sugar shortages, cement shortages, electricity shortages, and similar such claims, all we need to to know is that there is somewhere a restriction created by the government that is preventing the easy movements of goods into this country. The only way to get rid of that shortage or higher price and to destroy cartels is to remove that restriction and allow unhampered movement of goods.

Steel supply halts

Steel

Someone a bit more versed will likely raise the objection that not all price rises are due to supply shortages, and they would be right. Demand from the consumers also plays an active role. Say, people for one reason or another want to buy more steel, leading to a greater demand for it. This will lead to higher price simply because the supply is limited in the short run. In the absence of any government restrictions the rise in price will signal business owners across the world to start sending steel to Pakistan. This will get steel to the people, give profit to the suppliers, and all in all benefiting both sides.

Now if the government had restrictions of how much foreign steel could come into the country or had very high tariffs, it would lead to market distortions. The price of steel would start to rise but the supply won’t be able to come into the country to quench this demand inexpensively. Many projects that were underway would become too expensive to complete, or may be forced to use lower quality steel to get them completed. It’s here that the cartels might decide on holding back their domestic supply to take advantage of the situation, and let the prices go higher still. The point as noted before, that’s worth repeating again, is that the restrictions on free trade by the government cause all this mess. In the absence of these restrictions people would get what they want and prices would drop. The quality of steel would stay higher, leading to higher quality of other products that use steel as an input.

The solution to break these cartels then is to remove all these barriers to trade, and let people easily get cheaper goods of better quality. Using this prescription, not only do we end up destroying the cartels, but we also end up accomplishing it without ever raising a finger.

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