Of Ice Storms and CandlesPosted: December 2, 2009
In 1998, the province of Quebec was affected by the most important ice storm in its recent history, cutting electricity supply to over 1 million customers for a period of time varying between a few days to a whole month. During that time, I was living in a small town in the middle of the most affected area, sometimes referred to in the media as “The Triangle of Darkness”; sketchy, ain’t it ? Being only a decade old at the time, it is of very profound interest to me to reanalyze these events and put them under the scrutiny of my acquired sagacity. In this blog entry, I shall explain a particular event that caught my eye eleven years ago and that I ended up reanalyzing in a completely different manner after understanding the basic principles of economics. By extension, my conclusion also serves as a specific example of how the allocation of ressources through a market works and why it is an efficient system.
One of the most important things to have in an electricity outage is lighting, and candles provide a cheap and reliable alternative to flashlights or other alternatives to lamps. After a while, it seemed apparent the outage provoked by the ice storm would be very long. In my hometown, the suppliers of candles could not anticipate such a high demand and the stores were quickly depleted of their candles by eager customers. Furthermore, distribution was paralyzed by the outage, putting an ever greater pressure on the supply. All suppliers ended up running out of candles except one who made a sound business decision whilst saving the town of a complete penury: the grocery store.
It appeared that the owner of the store, a very clever and opportunist businessman purchased the remaining stock of candles in all the stores in the area and sold them for a much higher price. In fact, the price at which he sold the candles was around three or four times what one would normally expect to pay for such a good. This, at the time, appeared to my relatives and myself as a disgusting act of greed. In fact, on a strictly personal and motivational basis, it was probably an act of greed. Seeing the stocks of candles dropping, the manager quickly understood that the rarity of the good was skyrocketing, in a time where its main substitution competitor, electricity, was unavailable. Although one can question the ethical implications of such a move, the actions of the manager prevented, most certainly involuntarily, an even worst problem: a penury of candles at the time when they were the most needed.
In the case we study, the supply of candles from suppliers is constant since the usual supply routes are disrupted and the studied amount of time is very short, whilst the demand varies according to price, as it usually does. The situation is shown in the graphic below.
The two blue curves are the demand curves. The higher the price is, the lower the demanded quantity is. The curve with the steeper slope is the one representing the ice-storm situation. In this situation and compared to the normal situation, customers will always buy more candles as the number one substitute good, electricity, is unavailable. The initial price is and the supply is . If the price is not adjusted following the new situation, the demanded quantity will be . Since the supply is fixed and , there will rapidly be a penury, meaning that candles will be sold at but could have been sold at , preventing a penury.
The fact that we, as customers or producers, are all “greedy”, or said more gently, “economically sound”, is what permits a distribution of resources that is optimal. There is a finite set of resources on Earth and infinite needs; we thus need rationing methods. The simple fact is that there was an upcoming penury of candles in the town, aggravated by the fact that the electricity outage was anticipated to last for a very long time. People were buying candles like crazy, probably even irrationally so. This is a perfect example of customer greed. After all, how is it possible for an atomic customer to have the whole picture? There is no electronic board in the store detailing how many candles are left and how many each person should buy so nobody is left without candles. And even if there was one, how could anyone assess, without a prohibitively costly system, the metrics associated with obtaining such information ? Furthermore, everybody values candles in a different manner. If I already have a flashlight home, a candle is of very little use. I might be ready to pay $1 for a candle, but certainly not $3. On the other hand, if I have no alternatives, I would certainly be happy to pay $1, but I am still ready to pay $3.
In a sense, the grocery’s manager’s greed, combined with the greed of customers, is what prevented an even less enviable situation, i.e. unused or incorrectly used resources and customers left with pressing needs. By setting the price to , the demanded quantity was adjusted appropriately. Sooner or later, there would have been no candles left and many people really needing them would not have been able to get them, simply because they did not anticipate the candle-run or were not fast enough to evaluate their need in candles. On the other hand, some would have had too many and they would not have felt it was necessary to use them with parsimony, even if there was a critical situation of penury in the community.
All this seems beautiful but I will temperate my enthusiasm with a very important remark. On paper, the system works very well and prevents waste or badly allocated resources. Unfortunately, the price increase might mean some people cannot afford candles anymore, meaning they are unable to obtain a good that is essential. When this happens, government subsidies are the best solution. Wealth redistribution is, in theory, not efficient in a strictly economical sense (i.e. it is Pareto-inefficient), but it is simply the right thing to do. Collectively, we cannot accept that a certain portion of the population is deprived from what is essential, be it water, food, health care or candles, in this particular case. Without directly subsiding the purchase of candles in a specific town (which would have required a degree of flexibility way above any bureaucratic organization’s means), the Gouvernement du Québec provided an emergency financial aid during the crisis. Although I do not remember and have not researched the specifics of this plan, it is basically an aid aimed at the poorest to surmount the hardships associated with such a prolonged lack of electricity, including sudden hikes in essential goods.
In the end, one could say the store’s manager was greedy. One could say he was a heartless person profiting from other people’s misery. What is often forgotten is that customers are also very greedy, intentionally or not. This would never have been mentioned as such if there would have been a penury of candles; the stores would probably have been blamed for a lack of supply. After all, how is it possible to blame micro-actions when it is their aggregated effect that causes macro-problems?