Difference between revisions of "Artificial scarcity"

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'''Artificial scarcity''' describes the [[scarcity]] of items even though the technology and [[Economic production|production]] capacity exists to create an abundance. The term is aptly applied to non-rival resources, i.e. those that do not diminish due to one person's use, although there are other resources which could be categorized as artificially scarce.  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]].
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<hide>
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[[page type::article]]
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[[thing type::phenomenon]]
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[[thing type::tool]]
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[[category:economics]]
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</hide>
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==About==
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[[Artificial scarcity]] refers to situations in which [[scarcity]] is deliberately created, most commonly in response to a perceived business need. The term is applied to both [[rival goods]] and [[non-rival goods]], but the significance and mechanisms are somewhat different in each case.
  
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An example of artificial scarcity is often used when describing [[proprietary software|proprietary]], 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, [[Software license agreement|license agreement]]s, and [[intellectual property]] rights ensure that production is artificially lowered in order for business to gain a monetary benefit, thus giving businesses an incentive to produce more software.  Technocrats argue that if the [[Technocratic views of the Price system|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 distribution would exist.
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For more in-depth discussion of these contexts, see:
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* [[/rival]]
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* [[/non-rival]]
  
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[[Image:Ppfofdigitalinformation.gif|thumb|right|485px|[[Production possibilities frontier]] of showing trade-off.]]
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The inefficiency associated with artificial scarcity is formally known as a [[deadweight loss]].
  
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With nearly all goods, a trade-off occurs when decisions are made about production.  The graph shows the economic anomaly that occurs with artificially scarce products.  Because leather boots consume resources, a trade-off is noticed between running shoes and boots; i.e. in order to produce more boots one has to produce fewer running shoes because of limited resources. This trade-off is illustrated by a move from P1 to P2 in the Production Possibilities graph on the left.
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==Causes==
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One argument is that this arrangement has come about because [[capitalism]] and the [[profit]] motive create a situation where it is easier to profit from creating scarcity than from meeting unmet needs<ref name=ws1>http://www.worldsocialism.org/spgb/apr98/scarcity.html Artificial scarcity</ref>.
  
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With computer software, no significant trade-off occurs. To produce more of a certain piece of digital information, since virtually no resources are used to copy the information there is no trade-off with 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 increases in productivity and technology. <ref>[http://www.automation.com/sitepages/pid1698.php The Problems of Scarcity & Abundance]</ref>
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The argument goes as follows:
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* Producers are primarily motivated by profit &ndash; not to satisfy wants or needs, or even to provide [[economic value]].
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* Profit is maximized by satisfying [[effective demand]] through selling at the highest possible price.
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* When all needs are met, effective demand is low.
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* When effective demand is low, prices are also low (due to the law of [[supply and demand]]).
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* Therefore: profit can be increased by artificially limiting availability (through any of several mechanisms), thereby increasing effective demand.
  
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== The need for artificial scarcity ==
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==Mechanisms==
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Common mechanisms for creating or enforcing such scarcity include:
  
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In a market economic system, an abundance is not produced because excess product is considered an inefficient use of resources; those resources could be used elsewhere to produce something in greater demand to fulfill more wants. A paradox is reached with artificially scarce products, as an abundance is possible, yet without creating scarcity via legal or subversive means, there is minimal profitability. 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. <ref>[http://www.manageability.org/blog/stuff/artificial-scarcity/view Manageability- Artificial Scarcity]</ref>
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* {{wp/alt|monopoly}} pricing structures, such as those enabled by [[intellectual property]] rights or by high fixed costs in a particular marketplace.
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* {{wp/alt|cartel|cartels}}
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* {{wp/alt|guild|guilds}}
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* [[copyright]] - Grants authors a limited monopoly to copy and distribute their works.
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* Hoarding by traders and middlemen
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* Black market activities
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* Insider trading
  
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== Economic tools to promote artificial scarcity ==
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All these activities are beneficial for the producer who gets a high profit margin by increasing prices due to deficiency in the supply of goods. Ultimately it is the final consumer who bears the burden of not being able to obtain the amount of goods he requires and also being unable to get them at a reasonable price.
  
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* [[Price floor]] - This discourages access to a resource (creating scarcity and profits) and waste is produced.
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These actions are used to artificially prevent [[market failure]], artificially preserve profits for producers, or artificially reduce costs for a certain group. A state of complete abundance will crash any [[market economy]].
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* [[Price ceiling]] - Discourages production while encouraging consumption of a resource (two way creation of scarcity).
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==Related==
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* [[Subsidies]], which may be subsidies to production (usually creating surpluses) or subsidies to consumption (usually creating shortages).
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* {{wp/alt|Club good}}
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* [[Cartels]]
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* {{wp/alt|Criticism of intellectual property}}
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* {{wp/alt|Disney Vault}}
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These tools are used to prevent [[market failure]], preserve profits for producers, or reduce costs for a certain group.
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* {{wp/alt|Post-scarcity economy}}
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== Responses to artificial scarcity ==
 
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* The term is used by the [[Technocracy movement]]<ref>[http://www.technocracy.ca/simp/glossary.htm Technocracy Glossary]</ref> to point out one flaw of productive inefficiency in the [[Technocratic views of the Price system|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. <ref>[http://www.technocracy.ca/modules.php?op=modload&name=Sections&file=index&req=viewarticle&artid=15&page=1 Article explaining technocratic beliefs of current economy]</ref>
 
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* Standard free market responses to this assert that artificial scarcities are necessary to promote the development of goods in the first place. In the example of digital information, it may be free to copy information ad infinitum, but it requires a significant investment to develop the information in the first place (and if it didn't, there would be other cheap versions of that digital information being offered by other sellers). Another fair example is the drug industry.  Production of drugs is fairly cheap on a large scale, but new drugs are very expensive. This is because the initial investment to develop a drug is generally billions of dollars. Typically drug companies have profit margins much higher than this investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development. A feature of many free market economies is also time limit in patent rights; after a set number of years enjoying an artificial scarcity, the patent wears off and cheap generic versions of a product enter the market. This creates a situation of accelerated economic growth and high economic payout for all levels of consumers, but also promotes a large rich-poor divide.
 
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== See also ==
 
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*[[Disney Vault]]
 
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*[[Scarcity]]
 
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*[[Post scarcity]]
 
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*[[Technocratic views of the Price system]]
 
  
 
==References==
 
==References==
 
<references/>
 
<references/>
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[[Category:Technocracy movement]]
 
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[[Category:Scarcity]]
 
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Latest revision as of 20:04, 27 December 2013

About

Artificial scarcity refers to situations in which scarcity is deliberately created, most commonly in response to a perceived business need. The term is applied to both rival goods and non-rival goods, but the significance and mechanisms are somewhat different in each case.

For more in-depth discussion of these contexts, see:

The inefficiency associated with artificial scarcity is formally known as a deadweight loss.

Causes

One argument is that this arrangement has come about because capitalism and the profit motive create a situation where it is easier to profit from creating scarcity than from meeting unmet needs[1].

The argument goes as follows:

  • Producers are primarily motivated by profit – not to satisfy wants or needs, or even to provide economic value.
  • Profit is maximized by satisfying effective demand through selling at the highest possible price.
  • When all needs are met, effective demand is low.
  • When effective demand is low, prices are also low (due to the law of supply and demand).
  • Therefore: profit can be increased by artificially limiting availability (through any of several mechanisms), thereby increasing effective demand.

Mechanisms

Common mechanisms for creating or enforcing such scarcity include:

  • monopoly [W] pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace.
  • cartels [W]
  • guilds [W]
  • copyright - Grants authors a limited monopoly to copy and distribute their works.
  • Hoarding by traders and middlemen
  • Black market activities
  • Insider trading

All these activities are beneficial for the producer who gets a high profit margin by increasing prices due to deficiency in the supply of goods. Ultimately it is the final consumer who bears the burden of not being able to obtain the amount of goods he requires and also being unable to get them at a reasonable price.

These actions are used to artificially prevent market failure, artificially preserve profits for producers, or artificially reduce costs for a certain group. A state of complete abundance will crash any market economy.

Related

References

  1. ↑ http://www.worldsocialism.org/spgb/apr98/scarcity.html Artificial scarcity
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