Anticipating the Unintended #36: Price Ceilings Have the Floor

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?


PolicyWTF: Thoda Market Try Karo

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Raghu Sanjaylal Jaitley

Just the perfect flight fare

The Indian government announced this week that fares on domestic flights will be capped with both an upper and lower limit set for different routes. The minister for civil aviation was economic reason personified while announcing this. The upper limit will ensure airlines don’t gouge their customers who have been waiting to fly during the lockdown while the lower limit will prevent predatory pricing by hungrier or better-capitalised airlines, thereby, ensuring the financial viability of all airlines. Further, the minister added (I hope with a mischievous glint in his eyes), 40 per cent of all seats on one flight must be sold at a price less than the midpoint of the band. The whole thing left me breathless in its ambition.

First, the price list across seven bands that has been divined by the bureaucrats in the ministry. The prices are neither too hot, nor too cold. Just perfect. And, that 40 per cent thing was a clincher. Were the airlines thinking they could get away pricing all their tickets at the upper cap? Sneaky little flying tin boxes. This isn’t a government you can fool. What a clever little addition by a shrewd babu thinking two moves ahead! Also, no one knows whether it is 40 per cent of total capacity or utilised capacity. Or, what happens if five passengers, who were in the 40 per cent category, cancel their flights? We will tackle them as the situation evolves like our FM likes to say.

Anyway, what you will have now is the airlines will price all their tickets at the midpoint of the band till they sell 40 per cent of the tickets. Then, they will try selling the remaining 60 per cent at the upper end of the band. The net result will be the customers will end up paying more than what they usually paid in these sectors. Once they start doing that, the government will arrive at a new formula and we will have an endless cat-and-mouse game for our merriment.

My only disappointment was the timing. If the government knew this Goldilocks zone of pricing all along, why did they have to wait for the pandemic to show us the light? Also, why have they restricted this to just 3 months? After all, who doesn’t want just the right price that will help airlines make just the right profit while the customers spend just the right amount for a flight? In fact, why have we restricted this to airfares? What about cars, phones, slim-fit shirts, haircuts, pedicures, condoms and fish? There’s pent up demand there as well. Who is to say the companies won’t go all Shylockian on us now that we are ready to buy them? What are other ministries doing? No one is thinking about us like the civil aviation ministry. A comprehensive national price list (upper and lower caps included) for every item of consumption is the least the government can do for all of us at this stage. Plus, that 40 per cent rule. We can incorporate this into the Aarogya Setu app with a nice UI and an e-commerce plug-in. The government will then join Zuckerberg in being able to track our locations and our purchases through a single app.

Only what we think will be left untracked.

Schooling in profits

Meanwhile, in Karnataka, the education department has ‘slapped’ show-cause notices to 164 schools for increasing fees for the upcoming academic year. In a circular issued on April 28, the Department of Public Instruction (DPI) had prohibited private school managements from increasing tuition fees by the usual 15 per cent because of the financial crisis faced by families in the lockdown. My question is why prohibit price hikes only at schools? Why not on Imam Pasand? Its price has gone up by 15% in the past week. Why shouldn’t families get to eat their Imam Pasands secure in the knowledge their prices won’t go up this season?

Let’s unpack the school example a bit. In the past 2 months, the schools must have saved a bit on electricity, water and some consumables (chalks, markers, chemicals, lab instruments, housekeeping etc). Based on the spends that a large corporate office has on utilities and housekeeping, it’s difficult to see them saving anything more than 5-7 per cent on these items. In the past 2 months, the school has most likely digitised a lot of their content, bought licenses of a learning management platform, linked it to a videoconferencing platform and trained all their teachers on online teaching. These things, unfortunately, cost a bit. Moreover, when the schools open for next session, they will have to reconfigure classes to adhere to social distancing guidelines, sanitise the school more often, possibly hire more teachers (because the class size has shrunk) and spend more on any snacks or drinks they give at school.
Should the schools compromise on these areas because the fees are capped now? Or, are we bringing up that familiar Indian argument – they should make less profits? Who determines what’s the right level of profit? The ministry or the market? And, please look at the price of Imam Pasand, for god’s sake.

Getting migrant workers back

What do we do with the migrant labourers who have gone back home? There’s some temporary relief through the additional allocation of funds to the MGNREGA programme. But there are other suggestions being thrown around for the government to intervene. These include asking companies to build plants in those source states to absorb this labour, increasing the daily wage rate in MGNREGA plan further and raising the minimum wage rates in the destination states to attract the workers back.

These are interventions with good intentions that will only distort markets further. The unintended consequences will be higher unemployment and an increase in the size of the unorganised labour market. Left to itself, the demand for labour in cities will steadily rise as the lockdown is lifted fully. The workers who have gone back aren’t going to be immediately employed in their villages. They had left their homes because there weren’t any jobs there. Any supply shortage in city will reflect in the wages of workers and in their ability to demand better terms of employment. As the wages rise and transportation restored, the workers will find reasons to come back.

This isn’t magic. It is market mechanism. We should give it a try sometime.

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Disclaimer: Views expressed in the newsletter are personal and do not represent Takshashila’s policy views or recommendations.