On Lemons, Garlic and Onions

[ forthcoming in the Ukrainian Press]

The recent flu panic in Ukraine has shown itself in many interesting ways – there are the confusing declarations of politicians, there are the rumors and conspiracy theories, there are the masks (the newest status symbol) and now there are the prices of lemons, garlic and onions.

According to several media sources, the prices of lemons, garlic and onions has increased dramatically, making people unhappy, making politicians protest and even provoking the Anti Monopoly Committee of Ukraine into starting legal action.

That sellers of lemons, garlic and onions increased prices, however, should not come as a big surprise: if demand suddenly goes up, prices go up. This increase in prices signals to the suppliers they should supply more and once the extra supply arrives (or the extra demand stops), prices will go down again. It’s the same mechanism that explains the increased price of real estate and the increased level of wages during the economic boom period.

Increased prices will thus make it more likely that lemons, garlic and onions will come to Ukraine rather than other countries where there is no panic, and within Ukraine, will make it more likely that the lemons, garlic and onions are used by those who want them for their alleged health qualities, rather than for those who’d buy them simply for taste or decoration. In short, forcing prices to stay fixed at their pre-crisis level would not be smart as those lemons, garlic and onions available would not be used optimally, and the shortage of these products would last longer.

That people, who typically don’t mind when their wages increase, aren’t happy with these price increases doesn’t come to a surprise either – research by Daniel Kahneman, the 2002 Nobel laureate in Economics, and his coauthors showed already in the eighties that most people think that it is unfair for sellers to suddenly increase their prices if there’s a demand shock. Hence, a competitive market will provide a mechanism against excessive price increases: sellers, especially those that want to keep the loyalty of their customers, will have an incentive not to increase the price by too much, out of fear of losing their customers.

Still, governments, not only in Ukraine, often think they need to intervene. Many US states for example have anti-gouging laws that allow people to sue businesses that exploit disasters by increasing prices. While government intervention can be useful, for example, when business collude to artificially keep prices high, or by facilitating the import of the scarce goods, it’s probably not a good idea to restrict price increases that are demand driven. While market prices are sometimes imperfect, it’s hard to see how, especially in Ukraine, politically determined prices would do a better job. After all, most people probably prefer to buy at a high price rather than not be able to buy at all.