Artificial scarcity

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Further information: Post-scarcity economy

Artificial scarcity describes the scarcity of items even though either the technology and production capacity exists to create an abundance, as well as the use of intellectual property laws to create scarcity where there otherwise wouldn't be. 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.


Production possibilities frontier of showing trade-off.

The economic systems all over the world have sufficient technology to produce enough for all man’s requirements, yet there is scarcity of food items and other items of consumption. This is because scarcity is one of the pre-requisites for capitalism to survive.

Producers have only one motive in mind-profit. All their decisions are taken based on the fulfilment of that objective. Their motive is not to meet satisfy everyone’s wants or even needs but only to satisfy ‘effective demand’. They will only produce as long as they obtain a profit. For example, if people need a certain commodity in such an amount which they cannot afford, the producers will not reduce the price of that commodity just so that the consumer’s demands are met, because reduced prices mean reduced profits.

In a capitalist system, an enterprise is judged to be successful and efficient if it is profitable. However, profitability should not be used as a yardstick of measuring efficiency because as explained above to obtain maximum profits the firm may be restricting production and in doing so not 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.[1]

Artificial scarcity essentially describes situations where the producer of a product treats an item which he would not lose in the event of someone else possessing it. Ideas and digital information are prime examples of non-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.

—Phi Kappa Phi Journal[2]

Even though ideas, as illustrated above, are non-scarce, they are often treated as intellectual property, and are allotted artificial scarcity.

Economic actions that create artificial scarcity[edit]

Arguments for and against[edit]


Further information: Intellectual property

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 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.


Further information: Opposition to copyright

Right wing[edit]

An economic liberal argument against artificial scarcity is that the absence of artificial scarcity, businesses and individuals would create tools based on their own need (demand). For example, if a business had a strong need for a voice recognition program, they would pay to have the program developed to suit their needs. The business would profit not on the program, but on the resulting boost in efficiency caused by the program. The subsequent abundance of the program would lower operating costs for the developer as well as other businesses using the new program. Lower costs for businesses result in lower prices in the competitive free market. Lower prices from suppliers would also raise profits for the original developer. In abundance, businesses would continue to pay to improve the program to best suit their own needs, and increase profits. Over time, the original business makes a return on investment, and the final consumer has access to a program that suits their needs better than any one program developer can predict. This is the common rationale behind open-source software, such as Mozilla Firefox.

Left wing[edit]

Social liberals, Socialists, and Anarchists argue that artificial scarcity is beneficial for the producer, but unfavourable towards the consumer, as it enables the producer to capitalise off ideas and products that are otherwise not property in the physical sense.

Socialists extend their argument to include "socially wasteful production" such as the production of goods which are seen as ‘status’ goods like diamonds, expensive cars or production of those goods because the system demands it. This sort of production leads to a situation of artificial scarcity of socially useful goods because a large part of society’s resources are being diverted to the production of these goods. For example, capitalism has lead to the growth of money-based activities like banking-retailing services, remedial measures to deal with trade union issues and other such activities to protect capitalism such as weapons research and the development of security firms. [3]

Another leftist argument against artificial scarcity is that the doctrine of scarcity is a creation of the capitalist system. When civilisation was in the hunter-gatherer stage any kind of property was considered a burden for that kind of nomadic lifestyle. It was with the advent of the capitalist system and ownership of private property that our lifestyle became increasingly materialistic and consumerism mushroomed. So, in one way or the other scarcity whether real or artificial is a product of the capitalist system.[4]

See also[edit]


  1. ^ Artificial scarcity
  2. ^ Phi Kappa Phi (1952). Phi Kappa Phi journal. 32–34. Honor Society of Phi Kappa Phi. p. 45. 
  3. ^ Artificial scarcity
  4. ^ Artificial scarcity