Econ-ity » September 14, 2015

Daily Archives: September 14, 2015

Rule by (Making) Law… That’s what they mean

On august 16, Bizmandu published a very bothersome news which paints a bleak picture of the business environment in Nepal. A Himalayan Java (restaurant) employee had been apprehended for black marketeering. Here is what happened:

A customer orders a bottle of water… as per the price on the item menu, he is charged Rs. 130 for the bottle of water… the customer thinks he is being over-charged, following which, he lodges a complaint at the nearest police station…the police apprehends an employee of the restaurant…The owners are then asked to present themselves before the police (one of them has to make it back all the way from the US)… the employee is released by now… the owners are then forced to pay a fine of Rs. 75,000 to bail themselves out as professed by the CDO of Kathmandu, Mr. Eknarayan Aryal.

This particular case raises various questions like:

• Is this offense by the authority justified?
• On what basis were the restaurant owners charged?
• Should the price be determined by the government? If so, on what ground? Does the government’s intervention and price control have real benefits?

“The Black- marketing and Some Other Social Offenses and Punishment Act, 2032 (1975)” explains the process of the determination of the wholesale and retail prices of the goods. It further goes on to talk about the punishment in the case of violation of the Act. However, no clause defines the process of price-determination in case of a service; in this case, the bottle of water being sold by a restaurant. In this regard, the CDO has rightly remarked that there is no clear policy; however when questioned on what ground, the restaurant was charged a fine of Rs. 75,000, he reverted back to the same Act. Now, this raises concerns on two fronts. First, if a specific sector doesn’t fall under the jurisdiction of a certain Act, is it legal to charge the sectorial entrepreneur on the basis of an irrelevant Act? Second, there is no provision of charging the guilty a sum of Rs. 75,000, not even in the case of the sectors that fall under the Act. So, on what ground did the authority fine the entrepreneur?

This Act shows that the authority thinks it is above the law. Today, it fined somebody Rs. 75,000; who will stop it from fining somebody a sum of Rs. 500,000 for a crime that is not even committed (as per the law)?

The government has intervened between the producer and the supplier and has tried to set the price. But on what basis has the government tried to do so? If the customer at a restaurant himself cannot decide how much value the restaurant is offering him, how can the government suddenly determine how much value is being created for the customer? So, the setting of the price by the government is not really justified. It cannot just set the prices neglecting various factors in the market!

Looking superficially, the price control may seem like a nice action from the government, but there are many unintended consequences it can bring along. First of all, it reduces the profitability for the entrepreneurs. This may very well lead many of them to exit the industry in addition to discouraging new entrants which may cause a shortage in the market. The consumers will then have to queue up to get a service, pay black market prices to get the service faster, or pay high price for mediocre service. And that’s still not all that there is to it. When the market is set free and the prices are not controlled, the service providers compete among themselves to provide better services in cheaper prices and you never know the market price may fall well below the government mandated price while the services get better and better. Moreover, the producers that charge higher prices get less customers and vice versa. The customers always have a choice not to go to a producer that charges too high for his liking.

When the price is determined by repetitive interaction between the producers and consumers, both are better off. The transaction will only occur between the two if both find it profitable i.e. if both find they are getting something that they value more than what they are giving up; or the transaction would not take place at all. So, it’s a mutual exchange of benefits.

The government, by making intervention strips down the benefits of the mutual exchange in the free market. The government, by intervening, like in the case of Himalayan Java, only negatively impacts the economy and risks stagnating the economy.

Ashesh Shrestha

About Ashesh Shrestha

Ashesh Shrestha is an independent researcher. He has an Economics background and is interested in Monetary economics and Public finance.

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