Cars, bans, and artificial demand

After the ban on car imports was lifted, consumers suddenly saw a huge increase in taxes on new cars. While taxes may have been one reason, in my opinion, another reason for the increased costs was the ban itself. In short, if you ban or restrict something, the price of the good will go up. This phenomenon is called artificial demand or artificial scarcity in microeconomics.

The concept of artificial demand is based on the human psychological behavior that we assign a higher value to anything that is in short supply. The higher the value we assign to something, the higher the price. The entertainment industry and high-fashion product manufacturers practice this by releasing limited editions and selling exclusive stories. Advertising and commercials are completely based on creating artificial demand to stimulate sales.

Some large multinational and unethical companies also create artificial demand by manipulating the supply of goods in the market. In countries like the United States and the European Union, such deliberate market distortions are illegal. However, here in Bhutan, artificial demand and price increases can be created unknowingly through blanket bans and moratoriums.

Prohibition of ban

I have long been opposed to blanket bans as a tool of governance. Bans, moratoriums, suspensions, and policy changes have become the norm for elected governments since 2008. Blanket bans should be imposed as a last resort and only after a thorough, independent study that considers all short-term impacts and long-term consequences, as well as collateral damage to other sectors. For example, a “ban” on drone use by private users severely restricts filmmakers and creative industries, as well as their potential use in delivering goods and relief supplies to hard-pressed areas during disasters.

Bans may work as emergency short-term measures to stabilize markets or in emergency situations, but they are ineffective in the long run. Studies following the 2008 U.S. financial crisis and the 2012 European debt crisis found that sporadic sales restrictions largely failed to support prices and generally reduced liquidity. Bans can also distort the overall economy and job market over the long term and greater opportunities. While it is difficult to imagine something that is not happening right before our eyes, researchers can use mathematical models to simulate different options and possible outcomes and conduct cost-benefit analyses of any public policy. Bhutan aims to double its GDP by 2029 and become a high-income economy by 2034. If nothing stands in the way of these achievable dreams, it is erratic policies, unpredictable bans, subjective application of “rules,” and a declining population.

Banning car imports also does not achieve the goal of limiting imports. There have been several car import bans in the past 15 years. If you look at the data over the same period, the upward trend in imported cars is the same. Instead, these bans put young people working in car dealerships out of work.

The impact of the ban and

Artificial Demand

Fear and FOMO. I’m even inclined to think that a ban would drive sales higher, not lower them. That’s because unpredictability creates unfounded fear and suspense – and market speculation. Fear is rooted in our reptilian brain, which generates our most primitive and illogical instincts. Nothing triggers irrational behavior more than unpredictability. For example, my Isuzu pickup truck has almost 70,000 kilometers on it. At my current rate, it can be driven safely for another two years. But what if there is another import ban, and if this one turns out to be unreliable? I love to travel, my skin and my job depend on it. As a teenager, I survived on my old BGTS trucks, but some of them fell apart while we were on the road, but that didn’t matter. Like me, there may be many people who buy prematurely out of fear. One dealer told me that they had received several inquiries asking if there would be another ban because they wanted to wait for the current tax rate to be reduced.

Recover lost sales. STCB management clarified that the price hike was also the fault of the manufacturers. Of course, why wouldn’t they raise prices? The Bhutanese market may be small, but it still brings them more than 5 billion nunatrum in revenue each year. They will try to make up for the past two years of zero sales – and blame the price hike on technology, transport, steel prices, wages, crude oil, and even their cats and dogs. I also took a “swipe” at the dealers. They need to recover their overheads from the past two years. While the staff may have been laid off, they still need to pay for showroom rent, utilities, and cleaners and janitors. But ultimately, all these costs and expenses will be passed on to the customers, and ordinary people will ultimately bear the brunt of the ban.

Revenge buying. Nor should we be so naive as to think that foreign manufacturers and companies are angels. They know the theory of artificial demand and they know they can make money using it. They expect that young working people like us, who have only entered the job market in the past two years, will rush to buy at all costs. In sociology, this phenomenon is called revenge buying. Manufacturers also understand that unpredictable rules can bring unfounded fear to older people like me. Unlike us, their decisions are based on research and evidence.

Solution

The state has two powerful mechanisms to regulate public finances: monetary and fiscal instruments. These instruments can be used strategically and skillfully to steer the economy. For example, if a lot of public money is invested in public transportation, people will not be forced to buy private cars. If the government stops buying Prados and Land Cruisers en masse and chooses to buy Indian-made cars, a lot of hard currency will be saved. There are a lot of ideas as long as you don’t cling to old habits. You can’t find new solutions to any problem if the beliefs and behaviors that created the problem in the first place are the same.

As for the increasing number of cars on the streets of Thimphu and Phuntsholing (the only two places in Bhutan that face traffic congestion), the long-term solution is to develop public transportation so that everyone benefits. I would even go a step further and make public transportation free or heavily subsidized as in some EU countries. Thimphu has a population of just over 140,000 but about 70,000 cars, perhaps the highest ratio of cars to people in the world. There has been talk of trams and pedestrian streets. We should rethink these bold ideas. If pollution is the problem, the government floated the idea of ​​electric cars in 2014. I think the idea could be revived not only by reducing taxes but also by making all government vehicles electric. There would be less abuse and less reliance on fossil fuels.

Most importantly, the ban on car imports should not be imposed nationwide. Municipal issues in Thimphu do not necessarily apply to the other 19 urban centres. Good connectivity and seamless movement of goods, people and services are essential for economic growth. There is not even a reliable taxi service anywhere except Thimphu.

Lifting this counterproductive ban is necessary in itself, and I disagree with those who argue that we should extend it. On the surface, this seems logical, but national monetary and fiscal policies are different from personal savings accounts and spending habits. Every action by central banks and governments, no matter how big or small, has a huge impact on the economy and affects hundreds of thousands of businesses and individuals – most of which will never be revealed.

While the current government may not be responsible for the increase in tax rates, it has the power to review them without having to reduce them drastically. It can also come up with some new and innovative schemes. However, it cannot sit idly by because, like everywhere else, especially in Bhutan, we look to the government for relief, guidance and leadership.

Contributors

Dorje Wangchuck (PhD)

Professor, engineer, communication scholar