Price Controls: Guaranteed Adverse Consequences

It doesn’t take a PhD in Economics to be confused by the economic policies that are being thrown around by both political parties. It’s as-if none of our candidates understand the physics of how Economics work. The only explanation is that they believe that voters don’t understand it either.

One idea being proposed in many variations is the enactment of policies that put price controls in place to help provide relief to struggling consumers. Various forms of price controls have been tested throughout history and studied extensively so what’s amazing is that the price control policies that are being endorsed by our Presidential candidates are almost guaranteed to create punishing unintended consequences.

PRICE CONTROLS

In their basic form, price controls are government-mandated limits on the prices of goods or services. While they’re often implemented with the goal of protecting consumers and providing relief to escalating prices on specific goods or services, they almost always backfire.

WHY PRICE CONTROLS SEEM APPEALING

Affordability: The primary argument for price controls is to keep essential goods and services affordable for consumers.

Fairness: They aim to prevent price gouging during emergencies or for vital products.

Short-term relief: In times of crisis they can provide immediate financial relief to consumers.

EXAMPLES OF HOW PRICE CONTROLS BACKFIRE

Example 1: Shortages – Rent Control in New York City

Imagine New York City implements strict rent control, capping apartment rents at $1,000 per month.

– Initially, this seems great for tenants who can now afford to live in the city.

– However, at this price, demand for apartments skyrockets while the supply remains limited.

– Landlords, unable to charge market rates, stop investing in new buildings or renovations.

– Over time, the housing supply shrinks, leading to severe shortages and long waiting lists for apartments.

Result: While some lucky tenants benefit, many others can’t find housing at all.

Example 2: Price Ceiling on Milk (Reduced Quality)

Suppose the government sets a maximum price of $2 per gallon for milk.

– At first, consumers are happy about the low milk prices.

– However, dairy farmers, unable to cover their costs at this price, look for ways to cut corners.

– They might switch to lower-quality feed for cows or reduce quality control measures.

– Some may exit the dairy business altogether, reducing competition.

Result: Consumers end up with lower-quality milk or difficulty finding milk at all.

Example 3: Gasoline Price Controls (Black Markets)

During an oil crisis, the government might decide to cap gasoline prices at $2 per gallon.

– Initially, consumers are relieved they can still afford to fill up their tanks.

– However, at this price, gas stations can’t make a profit and many close down.

– Long lines form at the few open stations, with people waiting hours to buy gas.

– Some individuals start buying large quantities of gas and reselling it illegally at higher prices.

Result: A black market emerges, where consumers end up paying even more than they would have without price controls, and the distribution of gasoline becomes unreliable and potentially dangerous.

Example 4: Price Controls on Concert Tickets (Misallocation of Resources)

The government decides to cap concert ticket prices at $50 to make them more accessible.

– Initially, fans are excited about affordable tickets to see popular artists.

– However, at this price, the demand far exceeds the supply of tickets.

– Instead of prices determining who gets tickets, other factors come into play (like who can wait in line the longest or who has insider connections).

– Scalpers buy up tickets and resell them at much higher prices, pocketing the difference that would have gone to the artists and venues.

– With reduced profits, fewer concerts are organized, and venues have less money to maintain their facilities.

Result: Fewer concerts overall, potentially lower quality venues, and many fans still unable to get tickets unless they buy from scalpers at inflated prices.

CONCLUSION

PRICE CONTROLS don’t WORK. While price controls are often implemented with good intentions, they almost always lead to adverse consequences that can harm the very people they aim to protect. By interfering with the natural balance of supply and demand, they can create shortages, reduce quality, spawn black markets, and cause misallocation of resources.

And two quotes from the great and wise Howard Marks (@HowardMarksBook) sum it up:

“You can set prices for goods, but you can’t make people produce them”

AND

“Mandating lower prices is generally the least effective way to get them.”