The mismatch between supply and demand is symptomatic of non-market economies, such as command-and-control socialistic economies. In market economies, generally supply adjusts to the demand, perhaps with some lag. If the demand outstrips supply, prices rise, which induces entry of suppliers into the market, and a balance is reached eventually. In command-and-control systems the government interferes, and more often than not, prevents entry into the market thereby restricting supply. Prices are not allowed to do their proper function of market signaling and rationing the goods or services. Instead, monopoly rents are extracted by the government and these are then distributed in exchange for political support from various constituencies.
The particular instantiation of this general principle is the government imposed reservation or quota in the institutes of higher education in India. Relative to demand, the supply is very low. The government controls every aspect of higher education by either running its own institutions (such as the IITs and IIMs), or indirectly by heavily regulating private institutions. The regulation specifies who is allowed to run the institution, what its capacity can or must be, what is permissible to be taught, what the syllabus should be, who should teach and how much they can be paid, what the fees should be, and who should be admitted.
Each regulation introduces friction into the system. More damagingly, it introduces massive corruption. For instance, entry into the system for private providers of education is severely limited. Private firms have to compete to acquire a license. This is facilitated by appropriate bribes to people who have the authority to deny the license, such as senior bureaucrats and politicians. This is in effect competition for the market, which leads to limited competition within the market, which in turn implies high prices, limited quantity, and low quality. The limited quantity not only hurts the economy but is again very shrewdly exploited by the powers that bethey hand out quotas to select groups to buy their allegiance.
There is no earthly reason for why there should be a chronic shortage of any goods or services, least of all an essential service such as education. Yet they exist in India. Not too long ago, getting telephone service was a major achievement. People used to have to wait for many years to get phone service. Why? Because the government had determined that it was an essential service that could not be entrusted to the private sector. It took the liberalization of the telecommunications sector (and some help from technological change) to get us to the happy position that you can have telephone service within hours, and at prices which could not have been imagined in those days when the government was the monopoly supplier.
The big news these days is the protests over the proposed increase in reservation in institutes of higher education for certain sections of the population. The capacity is limited to begin with, and now it will become even harder for non-quota students to gain admission. But in the end, it does not matter whether the current quota is raised to nearly 50 percent of all seats or not. Either way, the difference is marginal. Instead of fighting over stale breadcrumbs, there should be a public debate about how to bake sufficient loaves of bread so that no one has to go hungry at all.
Tomorrow: Atanu Deys Primer (continued)