Thursday, November 6, 2008

When Supply and Demand Fail: Reports from the Tropics

Tropical Rot is a new blog which details the adventures of a friend of mine in Costa Rica. He’s been living there a while and I have been following his stories in other venues, but now you can and should follow his stories of the dysfunction and grim underbelly of what is actually one of the better off developing countries.

Yesterday’s post details his attempt to purchase high speed internet. Here’s the first paragraph

I have been waiting for high-speed internet at my house for a long time. Over
three years, to be exact. I have called the ICE, the government monopoly on
telecommunications, every few months and their response is always the same. A
bored voice on the other line says, “There are no ports available.” When will
they get some ports in? Again, the same answer every time, and quintessentially
Tico: “I wouldn’t know what to tell you.” (No sabría decirle).

I won’t do it justice, but the post goes on to detail long lines, indifference, and an unwillingness to exchange money for goods. They key economic reason here is that ICE is a monopoly. My guess is that the network may have a certain capacity and that government regulation may hold the price down. So in order to offer more people network ICE would have to expand the network, which could be too expensive.

I’m also considering another theory. Rot goes on to describe something even more puzzling. An US ex-pat living in Costa Rica writes into the local English paper:

When I first moved to Costa Rica in the mid-1970s, I bought canned mushrooms at
a local pulpería [small convenience store]. After a bit, the owner stopped
stocking them, and when I asked him why, he replied, “They sell so fast that I
can’t keep them in stock, so I don’t bother ordering them anymore.” I suggested
that he place a larger order, but it fell on deaf ears.

One place where typical economics fails is when one person's effort mainly benefits another person. ICE employees do not get paid based on how many people get internet, so why work hard. It’s possible that the pulpería is owned by someone else and the manager does not want to order more mushrooms, because it is more work. Similarly I wonder if the pulpería cannot raise prices too much on the mushrooms, since people might buy them someplace else. In this case if there is a fixed costed for each mushroom order, it might be worth it to not order a many mushrooms.

In the end though, sometime economic theories fail, people do things that are counterintuitive to an economist.
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