Artificial scarcity
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Artificial scarcity is an economic term describing the scarcity of items even though the technology and production capacity exists to create an abundance. Artificial scarcity occurs when the price of goods rises above their marginal cost. The most common causes are monopoly pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace. The inefficiency associated with artificial scarcity is formally known as a deadweight loss.
An example of artificial scarcity is often used when describing copyrighted, or closed-source, computer software. Any software application can be easily duplicated billions of times over for a relatively cheap production price (an initial investment in a computer, an internet connection, and any power consumption costs). On the margin, the price of copying software is next to nothing, costing only a small amount of power and a fraction of a second. Things like serial numbers, license agreements, and intellectual property rights ensure that production is artificially lowered in order for business to gain a monetary benefit, thus giving those in the software and digital arts business their livelihood. Technocrats argue that if the the price system were removed, there would be no personal incentive to artificially create scarcity in products, and thus something similar to the open source model of distributions would exist.
Most economists stress the trade-off that occurs when producing goods. The graphic shows the economic anomaly, as current economics deals only with allocating scarce resources, not abundant ones. If we want more leather boots, we'll have to give up producing running shoes because our resources are limited. This trade-off is illustrated by a move from P1 to P2 in the Production Possibilities graph on the left.
With computer software, no trade-off occurs (at least not one of significant value). To produce more of a certain piece of digital information, we need not to trade-off the production of other things, like shoes and boots. In essence, problems of artificial scarcity usually arise when a good that was once scarce becomes abundant due to extreme productivity and technologic progress.[1]
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[edit] The need for artificial scarcity
Price system economics requires that profit has to be made for every activity performed. Demand has to exceed supply in order for a profit to be made. If scarcity is allowed to reach zero, the economic model fails. If natural scarcity no longer exists scarcity has to be created to ensure function of the system.[2]
[edit] Economic tools to promote artificial scarcity
- Price floor - This discourages access to a resource (creating scarcity and profits) and waste is produced.
- Price ceiling - Discourages production while encouraging consumpution of a resource (two way creation of scarcity).
- Subsidies, which may be subsidies to production (usually creating surpluses) or subsidies to consumption (usually creating shortages).
- Cartels
Reasons that these tools are used is to prevent market failure, preserve profits for producers, or reducing costs for a certain group.
[edit] Responses to artificial scarcity
- The term is used by the Technocratic movement[3] to point out one flaw of productive inefficiency in the price system and takes the above example of digital information in microcosm. The movement claims that a technologically advanced state is capable of producing an abundance of virtually everything. Technocrats point out empirical evidence; even though the productive capacity exists to feed everyone in the world, we underproduce, we throw away, or we misallocate because there is no way to sell an abundance. They state that a conflict between scientific reality and economic tradition stifles the possibility for abundance. A price system only creates opportunities for scarce products.
