Artificial scarcity

Artificial scarcity describes the scarcity of items even though either the technology and production, or sharing capacity exists to create a theoretically limitless abundance, as well as the use of laws to create scarcity where otherwise there wouldn't be. The most common causes are monopoly pricing structures, such as those enabled by laws that restrict competition or by high fixed costs in a particular marketplace. The inefficiency associated with artificial scarcity is formally known as a deadweight loss.

In a capitalist system, an enterprise is judged to be successful and efficient if it is profitable. To obtain maximum profits, producers may be restricting production rather than ensuring the maximum utilisation of resources. This strategy of restricting production by firms in order to obtain profits in a capitalist system or mixed economy is known as creating artificial scarcity.

Artificial scarcity essentially describes situations where the producers or owners of a good restrict its availability to others beyond what is strictly necessary. Ideas and information are prime examples of unnecessarily scarce products given artificial scarcity, as illustrated in the following quote:

If you have an apple and I have an apple and we exchange apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.

Even though ideas, as illustrated above, can be shared with less constraints than physical goods, they are often treated as unique, scarce, inventions or creative works, and thus allotted protection as intellectual properties in order to allow the original authors to potentially profit from their own work.

Economic liberals argue that mechanisms that cause artificial scarcity are favourable to society as a whole since they encourage creativity.

Artificial scarcity is 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 pharmaceutical 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.

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