Corona Economics: Existence of Negative Price
During the delivery of lectures on Microeconomics, the students put questions to us like demand, supply, price can be negative. In all cases, answer is no but they can be zero. Zero demand refers to unwillingness to buy; zero supply means one does not want to sell.
In the special case when price is extremely low, the seller may be prompted to buy goods instead, and this situation characterizes negative supply. What about price?
Apparently positive price is the only possibility. If you want to buy goods or services, you have to pay price. However, in rare cases free goods may be available, signifying zero prices. But the existence of negative price is far from the reality.
What does negative price actually mean? If you buy something you won’t pay the seller, rather the seller will pay you! The corona world does not view this as surprising. Buyers in the United States (US) are getting money while buying fuels. Fuelling stations are overstocked in the pace of dramatic fall in demand for their product.
Coronavirus spreads, lockdown continues, hotel- restaurants-malls are closed, and the economy is in stagnant thereby plummeting the demand for fuel. Buyers of crude are paid 37.63 dollars by the sellers for every 1 barrel purchase. So price per barrel of crude oil in the US is -37.63 dollars, which is negative. Readers of Microeconomics should note this revision. Earlier we ruled out the possibility of negative price but here you find the opposite.
Is negative price attributable to crude oil alone? Is the US the only country where this microeconomic concept gets reverse turn? Possibly no. It appears to be a global phenomenon. Does negative price exist in Bangladesh? Yes, it does. Sellers with huge perishables in their stock might prefer buyers take them not only for free but they may be offered some money, given that the amount does not exceed the cost of freeing their stores, godowns hiring a third party, probably human labor. Price of the perishable turns out to be negative.
Similarly ‘Corona price’ of service can also be negative. Imagine a workaholic teacher who earlier used to educate students at school and home. Corona has paralyzed his life and now he is at the risk of psychological disorder. He might, aiming at spending busy hours, opt for offering tuition to students.
In addition to the lessons taught, instead of being charged, the student has to be paid a ‘corona premium’ as an incentive. Price of the service of this hypothetical teacher is negative.
Negative price does not adhere to goods or services market alone. Money market is more likely to experience negative price. Before corona outbreak, bank rates, for example of Bangladesh, Japan and the US were 5 percent, 0.3 percent and 1.6 percent respectively.
Commercial Banks, in order to meet the demand of investors, could borrow from the central banks at the above rates. Amid dramatic fall in the demand for investment, central banks are cutting their rates. But that is not the end of the episode. Finally, if not the commercial banks, governments will have to channel additional sum to the investors as a motivation to borrow. This indicates a negative price of money.
Coronavirus has changed the concept of non-negative price no matter what it is of- goods, service or money. This contradicts with the modern theory of pricing where price of a good or a service equals the amount of satisfaction obtained through consumption.
Arguably, this is not the only notion getting revised; COVID-19 will change many other concepts of modern economics once it wins the armless world war III where the opponent is not any individual or nation, rather the entire global community. If COVID-19 continues to spread, great depression will hit the world causing significant structural change in the world economy making the appearance unfamiliar to many of us.
Bangladesh is not yet ready to cope with the post-corona economic behavior. The overnight exponential rise in the number of infected people in Bangladesh underlies the warning of tougher time ahead made by the world health organization (WHO). The above mentioned notion of negative price is cited as a symbolic example of post-corona perverse economic behavior.
Rather than focusing on what we did or envisaged, master plan of future course of action should be in place. According to a Harvard research, at least two more years of social distancing is needed for arresting the outbreak. Ideas of distance working, distance learning, distance producing, distance training should be made familiar and operational. Private and public organizations should frame corona-robust policies. Central bank, being the monetary authority, should be proactive in order to meet the fiscal needs so that the hardest-hit vulnerable group can be rescued.
Dr. Mohammed Saiful Islam, Professor, Department of Economics, University of Chittagong, Bangladesh.