The Important Question in this dispute is ‘How should we determine the correct price of coal?’
I am not going to analyze the arguments given by NTPC, CIL and the different experts but I am going to to highlight a fundamental and very important economic point – that the market process is the only correct way of discovering the correct price of any good. The Law of Price says that at every hypothetical price that one may take up, every buyer demands a certain quantity of the good in question while every seller is ready to supply a certain quantity of the good.
But Coal is a producer good hence it may be that the Valuation of goods can be done is an another way. Prices of producers’ goods are also eventually determined by the subjective valuations of all the individuals who constitute the market. Its valuations as producers based on their subjective assessment of the demand schedules of consumers’ goods further determine the prices of producers’ goods.
The reason of dispute between the two bodies is very simple. The market process has been disrupted by the establishment of two massive monopolies on the two sides of the coal exchange market . CIL and NTPC are both government entities with a monopoly on the supply of coal and the production of coal-based thermal power respectively. Hence, there is no real free market in coal. In the absence of a free market for coal, there cannot be a market process for the discovery of the price of coal. The act of creating these two monopolies is against the market process. Problems related to the pricing of coal are an inevitable outcome of such subversion.
The real solution would require breaking the monopoly of NTPC and CIL over their respective product markets. This breaking of monopolies will lead to emerging of private bodies. When there will be fragmentation in the markets of supply and demand of coal, it will lead to correct market process. It will leave the these private entities to decide the correct price. Hence, there will be lot of contradictions for such a solution but if we want to end this dispute of pricing then we need to adopt the market process.
16 Comments. Leave new
Monopolies leads to deadweight loss or inefficient allocation of resources… very nice article!!
Yes its right monopolies leads to deadweight loss but it doesn’t mean to roll back all the monopolies. If this is so, Roll back the Indian Railways first. Privatize Indian Railways.
Very Informative article, But as you said CIL holds monopoly on the supply of Coal and NTPC holds monopoly on production of Coal based thermal power, Both are Different things. CIL’s Output is acting like the intermediate good for the NTPC, And NTPC is not only a manufacturing body who is demanding the Coal, There is also many firms who are demanded for example Steel manufacturers. So, as you said CIL is a Monopoly so the price must be decided from the monopoly model which consist the AR,MR,MC,AVC curves of Monopoly.
As per this is a Natural Resource, Therefore determining its Output is not easy, You don’t knew how many tons of Coal is under your land. The one of the way for determination of Price can be P=MC, The cost of mining or Importing the Coal or Selling the Spectrums to Its Uses by Bidding process.
Nicely written.
Yes.. The dead weight loss.. True that! A very nice article!
Well written.
Well written
good work
Well Written.. and informative topic 😀
Well written!
Good explanation. Would your analysis work for let us say determining prices of products such as I phone etched. Also wonder what your views are about minimum support price for agricultural products.
Very informative article.
Good analysis..!
OMG ! these guys need to settle down a bit.
VERY INFORMATIVE!!!
There are always news regarding some unit or the other in a NTPC projectbeing shut down due to coal shortage. nice article