On markets, maximization, maldistribution, and Moods
alternatively titled:
Governments and all of the other things that don’t seem to work on the population of India
also alternatively titled:
The Sizeable Rant of the Great Indian Condom
Rent control in NYC. European Union’s Common Fisheries Policy. The Soviet Union.
What is one thing that is common amongst all of these?
Government failure.
A textbook example, for me, is one that can perfectly embody the theory it is representing. Often, these examples don’t exist in real life. Disclaimers are issued – ‘very few examples of this theory (in the exact form that is given here) exist, and you’ll perhaps kiss a pink elephant before you find a real-world example.’However, prepare to be surprised because I have found a perfect example for a particular economic theory. . This blessed fortune of mine aside, be assured that you will kiss a pink elephant before this example goes into Indian textbooks.
The theory is government failure. And the example (perfectly fitting, unlike what can be said about its products) – is that of the market for condoms in India.
Government failure is the market inefficiency caused by government intervention if the particular inefficiency had not existed had a true free market been operating. The government has sought to ‘effectively clear’ the market in this case. Therefore, it has placed regulations and intervened in several aspects of the market for condoms.
Where the government first went wrong:
There’s a reason why private entrepreneurs spend so much on first impressions, on the unveiling ceremonies of les chef-d’œuvres of their company. It’s because these first impressions matter when it comes to selling the product. And that is precisely(of course) where the government went wrong. The first condom was named Nirodh (it couldn’t be called Kamaraj – the initial name decided for it – as that ruffled the feathers of one Mr. Kamaraj.) Nirodh literally means to block or disrupt. And this was the first impression the people of India had of a condom. Later on, its image evolved – this time, it was an instrument of protection, a vehicle for preventing diseases – during the HIV/AIDS crisis. This was how NACO sought to promote the condom. Fast forward to modern times – the condom is something you don’t want to be seen with, and if you’re a woman, your poor soul is beyond redemption. In fact, condoms are viewed so negatively that there isn’t a single free research paper or study focusing solely on the Indian condoms market.
Going forward:
It seemed like the government was hell-bent on making decisions that would be economically inefficient. This product’s branding, advertising and marketing of this product could be a paper at IIMs – How Not To Market Something 101. Condoms are now only available in public health care centres, pharmacies and anganwadis – as opposed to being available at the then hub of activity – the post office. The most important implication of this is that the accessibility of condoms took a significant, and so did its image.
Next, the specifications of the condoms cause a market inefficiency of the most basic kind – when supply does not equal demand. To give you a little background – condoms, as regulated by the government, can exist in only two sizes. Anyone who has lived amongst males knows that size is a very touchy topic. And everyone also knows that one size does not and cannot fit all. Thus, for the condoms that exist in the market – there is very little demand because they are not suitable for anyone.
On the other hand, there is a huge demand but no supply for the sizes that condoms are not manufactured in India. Thus, the market is not able to clear at equilibrium. Since we do not have a particularly free market, there is allocative inefficiency as there is no price mechanism (because of the price cap) to signal to the producers whether consumer demands and preferences have changed or not.
Diving deeper, we come to the subject of subsidies and price ceilings. The government has also capped prices in the private sector. While being Good Samaritan policies, price ceilings and subsidies, are not economically sound. The main reason this happens is that when price ceilings are introduced, prices are often lower than the equilibrium price which causes the demand for the product to rise beyond the equilibrium demand quantity, while supply starts shrinking. This results in fewer consumers being able to obtain goods, and the deadweight loss that subsequently forms results in reduced welfare of the society at large. This is represented by the graph I’ve drawn below:
DEADWEIGHT LOSS IN AN ECONOMY
The painful PSU:
A major player in this market is the public sector undertaking HLL that makes Nirodh. Its products are priced at a meagre amount due to a) welfare reasons and b) it has the government’s funds at its disposal and can thus release highly subsidised products without ever shutting down even when it makes a loss. There is very low productivity and a high case of wastage. There is extreme underutilisation of resources, along with inefficient and inequitable production. More importantly, the main aim of PSUs is not making profits – which works as a significant disincentive. Employees are permanent, there is little to no innovation, and the quality of the products is poor.
The unintended consequences of this policy are that it leads to an increase in either a) population or b) other contraceptive methods. The market is such that condoms are the best option – latex is neither reactive nor permanent, has no side effects, protects against STDs. While contraceptive pills are the next most popular alternative, they are hormonal drugs that often cause various side effects. Copper-Ts and IUDs are popular alternatives, but given the hazards and the lack of specifications associated with these, it may lead to greater oppression of women’s voices and increased dangers to their bodies. Although these don’t directly translate to economic losses, they affect the mindsets and productivity of these women (if they are mothers, their children too) in the long run.
Measures:
An increase in accessibility, which will help increase sales and thus, profits, and removing the stigma around condoms and sexual intercourse can help. Another one is to amend the Drugs and Cosmetics Act, 1945. At least the private market can be allowed to clear on its own by removing the price cap. Improving the quality will lead to increased and widespread usage because this is one product where a leak translates to a life. Surrogate advertising (liquor) can also immensely help in normalising the use of the product. Increase in input efficiency, complete utilisation of present plants, and innovative techniques will aid the market in clearing better.
Examining the fact that the condoms market is an oligopolistic one – price competition is impossible because HLL exists, and the others are barely making profits given the price cap and the low usage. Also, the demand curves will be kinked due to price stickiness as the product is relatively elastic. Thus, one should focus on improving non-price strategies and keeping the price close to what the other firms have.
Conclusion:
While the government may be intervening to bring down the price, the real reason the market doesn’t clear efficiently is because of various factors – inefficient advertising, remote accessibility, imperfect suitability of tastes and preferences, misallocation of resources. However, one must also acknowledge that having subsidised or free condoms aren’t the problem. In fact, in a country where a majority of the population is illiterate and poor, this is one of the welfare policies that makes perfect sense and can prove to be a powerful tool of population control. This can happen only if the implementation is done more effectively and if proper solutions are found for the problems in the areas discussed above.
- Rajlakshmi Chavan.
T.Y. B.Sc.
References used:
– https://www.econlib.org/archives/2016/05/why_most_regula.html
– H. Beales, et al., “Government Regulation: The Good, The Bad, & The Ugly”, released by the Regulatory Transparency Project of the Federalist Society, June 12, 2017 (https://regproject.org/wp-content/uploads/RTP-Regulatory-Process-Working-Group-Paper.pdf
– Posner, Richard A., Theories of Economic Regulation (May 1974). NBER Working Paper No. w0041, Available at SSRN: https://ssrn.com/abstract=259352
– https://www.economicsonline.co.uk/market_failures/government_failure.html
– Orbach, Barak, What Is Government Failure? (May 15, 2013). 30 Yale Journal on Regulation Online 44 (2013), Arizona Legal Studies Discussion Paper 13-10, Available at SSRN: https://ssrn.com/abstract=2219709
– https://www.econlib.org/library/Enc/PriceControls.html
-Rajlakshmi Chavan
TY B.Sc Economics