– This article was originally published by Ayushma Maharjan in the Himalayan Times on the June 09, 2019.
Given the changed political and administrative architecture of the nation, the Government of Nepal is incessantly working to draft and amend laws to ensure their coherence and relevance with the national charter. For the same, the Consumer Protection Bill (CPB), with amendments to the Act endorsed in 1998, is tabled at the parliament for discussion.
In line with globalization, consumers experience plethora of goods and services at their disposal. From a government’s point of view, it could thus be justified if it enacts laws to safeguard consumers against potential unfair practices from producers/suppliers. The CPB, thus looks to protect the constitutional right of consumers’ quality goods and services, and provides a platform to address their grievances, if any.
However, like any other legislation, this one is prone to unintended consequences as well. As the Bill is being discussed, this article will focus on highlighting two important cases that might yield such negative unintended consequences – price and quantity controls, and the uncertainty that looms throughout the legislation.
Controls and Loss of Consumer WelfareArticle 4 subsection 2 of the bill – regulate prices and supply of goods and services, even though are legislated with best of intentions, are nonetheless liable to negative ramifications.
Article 4 subsection 2 of the bill – regulate prices and supply of goods and services, even though are legislated with best of intentions, are nonetheless liable to negative ramifications.
Firstly, price control levied with the motive of protecting consumers, despite its appeal, are not the most popular instruments among economists. Price controls distort allocation of resources in the market. Secondly, maintaining a supply of goods and services (especially essential goods) through regulating its price and stock distorts the market mechanism. Both will lead to problems like shortages, rationing, deterioration of product quality and potentially black markets.
Policy makers should fathom that such interventions from the government can never overcome the economic forces of supply and demand. Since supply and demand shift constantly in response to tastes and costs, but government prices change only after a lengthy political process, government prices will effectively never be an equilibrium price. This means that the government price will be either too high or too low. This will in turn result in reduction of consumer welfare either through availability of only low-quality goods and services or unaffordable prices thereof.
Prices of goods and services are affected by many other factors beyond the cost of inputs, processing fees and the producer’s expectations of profit. We do not have to look very far back in history when during the border blockade, consumers of petroleum products paid as much as Rs. 1000 per liter of petrol while he government-fixed price was around Rs. 100. Of course, no one expects situations to be as inhospitable as during those times, but how themarket decided on what the price should be is a good take-away from this painful experience.
Another example of how price control works against the benefit of consumers can be seen each time the Nepal oil Corporation reduces prices. Prices come down on one hand, but the suppliers invariably create an artificial shortage in the short run.
Moreover, the outcome that is likely to be achieved with the implementation of such clauses contradicts with Article 16 subsection 2 clause 6 and Article 17 subsection 2 of the bill – to maintain adequate supply of all the goods and services in the market.
Uncertainty and the ensuing lack of predictability and security
Government regulations often require citizens to refer to other places for certain provisions regarding even the contents of the same Act. This is largely done to direct the citizens towards other existing legislations or buy time for the regulators to make specific provisions about those things. But in either case it does one thing that can hurt the economy i.e. increase uncertainty and unpredictability for investors and entrepreneurs. For example, in this 33-page bill, there are 41 instances of “as prescribed (elsewhere).” This means that people will have to refer to 41 other places to understand this law completely. More importantly, when it specifically says as prescribed in the directive and the directive has not come out yet, it makes the law subject to the discretionary powers of the administrators and reduces the sense of predictability and security (about future policy environment) that are very crucial to any investor or entrepreneur’s decision. This is likely to affect the investment climate of the nation at large.
These are just a couple of instances how a legislation that is being drafted with perfectly noble intentions could backfire. Since the Bill has not been endorsed by the parliament yet, there is time to still bring it to larger public discourse and make amendments. Moreover, such should be a practice for all other public policies that are being crafted in the new Nepal such that public policies truly reflect the best interests of the public.