Artificial scarcity
Encyclopedia
Artificial scarcity describes the scarcity
of items even though the technology and 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
.
An example of artificial scarcity is often used when describing 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; and these are already fixed costs in most environments). 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, license agreement
s, and intellectual property
create artificial scarcity, and give monetary value to otherwise free copies. Technocrats argue that if 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 dominate.
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.
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.
Artificial scarcities are said to be necessary to promote the development of goods. 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. In the example of the drug industry, production of drugs is fairly cheap to execute 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, due to strict regulation. Typically drug companies have profit margins much higher than this initial investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development . A feature of many 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. Thus, the drug developer gets a return on investment, and other companies subsequently compete to lower prices.
There have been plenty of examples however where the development of goods was present without artificial scarcity, particularly with the free software movement
. Free software like Firefox, Linux, and Audacity are all examples of new development without scarcity. Additionally, plenty of copyrighted works have been created under the Creative Commons
. Many works which have been created without scarcity can be watched for free on YouTube, or viewed on various blogs and websites.
These actions are used to artificially prevent market failure
, artificially preserve profits for producers, or artificially reduce costs for a certain group. Therefore, a state of complete abundance will crash any market economy.
Scarcity
Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be...
of items even though the technology and 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
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
pricing structures, such as those enabled by intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
rights or by high fixed costs in a particular marketplace. The inefficiency associated with artificial scarcity is formally known as a deadweight loss
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
.
An example of artificial scarcity is often used when describing proprietary
Proprietary software
Proprietary software is computer software licensed under exclusive legal right of the copyright holder. The licensee is given the right to use the software under certain conditions, while restricted from other uses, such as modification, further distribution, or reverse engineering.Complementary...
, 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; and these are already fixed costs in most environments). 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, license agreement
Software license agreement
A software license agreement is a contract between the "licensor" and purchaser of the right to use software. The license may define ways under which the copy can be used, in addition to the automatic rights of the buyer including the first sale doctrine and .Many form contracts are only contained...
s, and intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
create artificial scarcity, and give monetary value to otherwise free copies. Technocrats argue that if the price system were removed, there would be no personal incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
to artificially create scarcity in products, and thus something similar to the open source
Open source
The term open source describes practices in production and development that promote access to the end product's source materials. Some consider open source a philosophy, others consider it a pragmatic methodology...
model of distribution would dominate.
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.
Support for artificial scarcity
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 coercive means, there is minimal profitability for the creator (or the distributor) of the product. If scarcity is allowed to reach zero, the economic model is irrelevant. If natural scarcity no longer exists, scarcity has to be created to ensure a price system of supply and demand.Artificial scarcities are said to be necessary to promote the development of goods. 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. In the example of the drug industry, production of drugs is fairly cheap to execute 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, due to strict regulation. Typically drug companies have profit margins much higher than this initial investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development . A feature of many 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. Thus, the drug developer gets a return on investment, and other companies subsequently compete to lower prices.
There have been plenty of examples however where the development of goods was present without artificial scarcity, particularly with the free software movement
Free software movement
The free software movement is a social and political movement with the goal of ensuring software users' four basic freedoms: the freedom to run their software, to study and change their software, and to redistribute copies with or without changes. The alternative terms "software libre", "open...
. Free software like Firefox, Linux, and Audacity are all examples of new development without scarcity. Additionally, plenty of copyrighted works have been created under the Creative Commons
Creative Commons
Creative Commons is a non-profit organization headquartered in Mountain View, California, United States devoted to expanding the range of creative works available for others to build upon legally and to share. The organization has released several copyright-licenses known as Creative Commons...
. Many works which have been created without scarcity can be watched for free on YouTube, or viewed on various blogs and websites.
Economic actions that create artificial scarcity
- Cartels
- CopyrightCopyrightCopyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
- Grants authors a limited monopoly to copy and distribute their works.
These actions are used to artificially prevent market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
, artificially preserve profits for producers, or artificially reduce costs for a certain group. Therefore, a state of complete abundance will crash any market economy.