Over at Truck and Barter, Ian Cook has written the post I would like to have written about the flu vaccine shortage:
Hold the phone! You mean to say that government purchasing of vaccines at a forced discount has something to do with this? Could these be the mysterious “business reasons” that cause some companies to underproduce vaccines?
I’m shocked. Shocked, I say.
I think Ian’s right. Any time there’s a profit to be made from investing in more production capacity, and over a long enough time horizon that investment doesn’t happen, that means you should check your assumption that there’s a profit to be made from the investment. If you are forced to sell your output at a lower-than-otherwise price, that reduces your investment incentive. Voila.
And yes, the same logic applies to price caps in electric power markets and potential disincentives to investment. There are some similarities — the peaking nature of demand, the seasonality of demand, uncertainty due to weather, and so on.