A matter of sensitivity

In this special guest post, Lecturer in Statistics and Political Economy at the University of Melbourne Dr Mike Pottenger provides an economic analysis of the market for people smuggling between Indonesia and Australia. He explains why national policies aimed at reducing the number of boat arrivals here are unlikely to have as much impact as their architects may predict. 

Elasticity and people smuggling

A typical approach to analysing markets for goods or services is to think in terms of supply and demand. Even to those who have not studied economics, the idea that a market equilibrium price and quantity occur where supply equals demand is likely to sound familiar. But there is a more subtle and fundamental concept that often eludes even those who have studied economics: elasticity.

It’s easy enough to assume that an increase in demand (whether due to random shocks or policy shifts) will result in a higher equilibrium price, but how large that increase is will depend very much on the elasticity of supply, just as the impact of a given change in supply will depend in turn on the elasticity of demand.

Elasticity refers to the proportional sensitivity of one variable with respect to another. One commonly measured elasticity is the proportional sensitivity of the quantity of a good demanded to changes in its price. Consider how many cups of coffee you’re willing to buy at the current price. Better yet, imagine the total number of all cups of coffee purchased in the country. If a fall in the supply of coffee drove the price up by, say, 5%, what would be the corresponding change in the quantity of coffee consumed?

If the quantity of coffee demanded falls by more than 5%, economists regard demand for coffee as being elastic, in that it is more than proportionally sensitive to the change in price. If the quantity of coffee demanded falls by less than 5%, we regard this as inelastic, because the quantity demanded is less than proportionally sensitive to the change in price.

I’m willing to assume demand for coffee would be inelastic. Why?

Think of the integral role coffee plays in so many of our morning routines or social calendars, let alone its addictive characteristics. These make coffee something of a necessity – a good for which people are relatively more willing to stomach an increase in the price.

For a necessity, it can take a substantial proportional increase in the price before there’s a significant effect on the quantity being purchased. In markets for illicit narcotics, for example, even penalising buyers and/or sellers with jail time can be relatively less effective at reducing the quantity of drugs bought and sold than it might if demand for the drugs was more elastic.

What does this have to do with people smuggling? In Australian politics in recent years, and in particular during the 2013 federal election, whenever the topic of asylum seekers has been raised there has been much talk of the “business model” of people smuggling. What can the basic concept of elasticity tell us about the likely effects of policies in this area?

Before going any further, it’s worth noting that what follows is an abstract application of simple economic theory to an undoubtedly complex and emotionally and politically-charged topic. It is not intended to trivialise the certainly traumatic experience of people seeking asylum by comparing them with a consumer’s choice about whether or not to have another cup of coffee. Nor is it making a judgment about the morality of a market for people smuggling. The following is intended only to offer a different way to think about policies ostensibly directed at such a market.

In theory, a deterrent levelled at a producer can reduce the supply of a good or service, while a deterrent aimed at the consumer can reduce demand. Increased penalties for people smugglers and mandatory detention for people seeking asylum can be considered deterrents aimed at producers and consumers, respectively, in the market for people smuggling. The effect of such policies will depend on the elasticity of supply and demand.

Without wanting to sound flippant, I think it’s reasonable to assume that for asylum seekers, the demand for a way to get to another country is pretty inelastic, given the kinds of circumstances that drive people to flee their homes in the first place. In instances where few, if any, alternatives are available, the demand for people smuggling will be particularly inelastic. In such a case, the demand will be inelastic with respect to increases in the deterrent, rendering it relatively insensitive to such changes in policy. That suppliers appear to have a revealed preference to provide the service in spite of the increased penalties suggests that supply is also relatively inelastic to an increase in the deterrent.

But there’s a more conventional way to think about elasticity in the market for people smuggling, and that’s in terms of price elasticity. Consider the case of increasing penalties for suppliers of people smuggling. Let’s assume that such suppliers are sensitive to increases in a deterrent, and that a policy change would result in a substantial decrease in supply. Even so, if the same properties that make demand inelastic with respect to deterrents also makes it inelastic with respect to changes in price, then if and when supply falls in response to a deterrent, the decline in the market equilibrium quantity of people smuggling occurring will be relatively less than we might otherwise expect.

About the author:

Mike Pottenger has a background in political science, economics, history and finance, with a PhD examining the international political economy of corruption and organised crime. He is currently conducting research on organised crime and illegal markets, corruption and accountability, macroeconomic policy responses to crises, and wealth inequality. Since 2006 he has lectured at the University of Melbourne, teaching subjects in fields of political economy and statistics.

Disclaimer:

All posts are the opinion of the individual author involved. The Asylum Seeker Resource Centre does not edit or review posts prior to publishing.