Today’s Daily Star has an economics lesson from Ariana Ahmed. It’s a worthwhile economics lesson to give - as policy makers often forget the verities underlying the operations of markets and prices  and suchlike. But I couldn’t help but feel a little queasy reading AA’s piece, ’cause it’s got a  lot of underlying assumptions that may or may not be valid. I wish AA had done more to bring some of these assumptions to fore. If you are trying to teach basic economics to a government ostensibly led by an economist,  you owe it as much.

Consider the basic assumption underlying AA’s model: Non-monopolistic price setting by the suppliers. AA basically assumes that the rise in prices is caused by a right-ward shift of the demand curve. This obviously leads to an increase in the price. And AA is right in pointing out that the government forcing suppliers to lower their prices will lead to a rightward shift in the supply curve- and again, an equilibrium with reduced supply and much higher price.

But there’s the assumption there that I find troubling - that the food supply in Bangladeshi markets is competitive. Now it’s possible the market is not competitive - and the suppliers are actually price setters, not takers. This could happen in a number of ways:

1. There actually are these giant colluding food supply syndicates hoarding commodities and setting prices. I find this slightly plausible because our import controls put so much power in a few hands. But surely a few hands controlling the supply of food in the BD markets in such a scale requires a fair degree of control over a number of things - particularly transportation, supply chains, a lot of financing and a fair amount of muscle to discipline breakers of oligopolistic agreements. I have seen the syndicate argument being thrown around a lot in casual conversation and in the press, but I’ve never seen any names mentioned in either. That leaves us with three possibilities: the syndicates don’t exist, the syndicates exist but noone’s done the necessary investigative work (Mahfuz Anam, a nation turns its lonely eyes to you… oooh oooh oohh) , or there’s some kind of secret code of omerta surrounding such syndicates. I find the first two arguments seem more plausible to me - but I wish someone had the hard data (beyond we Bengalis are a nation of talkers) to back my Bayesian priors.

2. More plausibly, local traders find themselves in the position of temporary local monopolies in setting prices for food stuff. They can do so for two reasons:

(i.) The cost in terms of time and effort for buyers to go find an alternative to buying the good is too high. (This may particularly be true if the good in question is orsaline, and you’re child is lying in her cot dehydrated.) Let’s call the cost C. The local trader can charge P + C. But this would require local traders in New Market, for example, to get together and start plotting how they are going to set a higher price. And probably hire some goons to enforce the higher prices to keep discipline among the plotters.

(ii.) Local traders know that it will take some time for new supply to enter the market, and in that period they can set monopolistic prices and price discriminate at will. This may particularly be an issue in the case of disasters. 

In the case of price discrimination, it’s important to remember what’s happening. There’s a transfer of the consumer surplus from consumers to the price discriminators. There may be valid policy reasons for the government to not want that to happen - particularly if the consumers are being squeezed by the fact that their houses are half-way under water …

I am not saying that the picture of Bangladeshi markets I’ve painted is an accurate one. My point is that there needs to be more thought and analysis of the realities of the Bangladeshi food market, beyond the basic supply-demand graph underpinned by incompletely stated assumptions. Now I sympathize completely with the motivation behind AA’s argument - that the operations of the market place must be left to themselves and the government should not be messing around with prices. I have written as much before, as recently as last week. But the government does have an important role to play in setting up the rules of the market, and making sure that participants stay away from collusive behavior. Even Adam Smith says as much.

One hears of a lot of talk about price setting syndicates and colluding hoarders. I’d like to see proof either way - that they set market prices, or they don’t. Assuming them into or away from our models does little to clarify the issues at stake. I’d like to see a more complete analysis of the operations of the food market in Bangladesh somewhere. Surely someone from CPD or BIDS has looked at this closely?