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India's Steel Price Floor Is A Bad Idea - Why Make Things More Expensive For Consumers?

By Tim Worstall , 2016-12-05 12:00:00

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India's economic policy is, in that old English sense, something like a curate's egg*. Parts of it are excellent and others, well, not so much. One example of that not so much is this idea of minimum import prices for certain types of steel. There is a price which the government says is said floor price. Steel that costs less than this may not be imported. This is simply a bad idea. Steel is an intermediate good, we use it to make other things. We normally and generally think that lower prices for intermediate goods are a good idea.
For example, beer is an essential input into the process of journalism (as absolutely anyone who has ever met a journalist will be able to confirm) and thus cheaper beer makes journalism itself cheaper to produce. Hurrah! for any specific amount of resources devoted to producing journalism we can now have more of it as a result of cheaper beer. We are richer by the amount that we value that extra journalism, or the resources we've saved on that same amount.
And to be less jocular about it this is also true of steel. Steel can be used to make, say, refrigerators. In a competitive market a reduction in the cost of steel to build refrigerators with will lead to a reduction in the price of refrigerators. For the same societal resources devoted to their production we can have more refrigerators--or, of course, those who purchase them have a little more to spend on other things as well. Either way, we're all richer because the price of that intermediate input has gone down.
Thus this is a bad idea:
Government has yet again extended the floor price of imports of steel products for a further two months as the government tries to protect the domestic industry from cheap overseas shipments, especially from China.
The floor price, or the minimum import price, was introduced for six months in February, the first time the government had taken such a step in more than 15 years. It was extended from its initial expiry in August to Oct. 4, and then till Dec. 4.
We know why this is done of course. Indian domestic steel manufacturers do not like making a loss. And it's also true that domestic manufacturers are a concentrated economic interest. There're not all that many of them and they are very, very interested in not having to face competition from low priced steel. Thus government is going to listen to them as they shout about the subject. Us consumers of steel, the end consumers, are of course a widely dispersed interest and we're not, really, all that worried about an extra Rs100 or whatever on the price of a refrigerator. There are other more interesting things for us to think about like whether our wife got that dessert recipe from our mother written down properly. And the factories that use steel are a more dispersed interest than those which make steel.
Thus, just the way that economic power works out in the economy, we end up with these import restrictions on prices and volumes. Restrictions which make all of us poorer at the benefit of the domestic steel producers.

But that that is the way things work out does not mean that that is the way that things should work out. We're supposed to be running the economy for the benefit of consumers, not producers. And thus we should not be restricting cheap imports. This steel floor price is thus a bad idea and should be rescinded.
*For those not blessed with the English vernacular it's from an old Punch cartoon. Bishop has curate at the breakfast table and leans over and says "I think your egg is off!" response - "Oh no my Lord, parts of it are excellent!" It's not actually a great joke but then the Victorians told very few thigh slappers.
Source: Forbes.

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