xge made a very good point under my entry In Market We Trust. That is exactly what I am trying to say about the market – the difference is, xge just gave better examples. Let me continue the argument here.
The government decision makers are very likely to make decisions based on intuition, and the planned economy mindset. I, myself, made even more frequent mistakes when I make decisions about the market. I admit that I did several things wrong in my business without respecting the market laws. Here are some examples about the actions people take (basically using xge’s examples).
The recent sharp increase in the real estate price in Hainan was a typical example. When the Hainan announced the “International Tourism Island” strategy, the house price almost doubled over night by the stimulate.
The Hainan government was scared because of the jump in price. Then, in order to control the price, they immediately announced to pause supply of all commercial residential lands. Not surprisingly, the price doubled over night again.
Train Tickets and Taxi
Train tickets in Spring Festival times are extremely hard to get because of the huge demand (2.5 billion people/time needs to travel in the 40 days), and limited supply (not enough trains). The price for the train tickets went as high as 4x of the original price in the escort market.
In order to keep the price low, the government requires all train tickets keep the cheap price, and crack down all the escort market, and implement Real Name system for train tickets – none of them touch the supply and demand. Not surprisingly, it is still hard to find a ticket.
For taxi, people complain that the taxi is expensive, and hard to hire in rush hours, so “illegal taxi” started to emerge to help them out. In order to keep the price of taxi low, the government tried everything they can to crackdown the illegal taxis, greatly reduced the supply. Not surprisingly, taxi is harder to get, and the government enforced low price (lower than fair market value) keeps taxi drivers out of the market. (Well. for the taxi business, the real problem is, the monopoly of government owned taxi companies get too high fee out of the pocket of taxi drivers, and use the power to keep private sector entering this market).
Supply and Demand
Finally, we started to understand the simple market rule: price is determined by the supply and demand. The only way to drive price down is to increase supply, and the only way to drive price up is either to decrease supply or increase demand.