Price Controls Are a Bad Idea

Price controls are a bad idea for many reasons, but most importantly, they’re a bad idea for two key reasons in particular: they are morally unfair and they reduce supply.

For our purposes, a price is an agreement by two people to exchange something for a given value. It’s an agreement between a seller and a buyer both want to trade: Imagine if Bob the buyer has £1, but would prefer to have an apple than that money, and Sally the seller has an apple but would prefer to have £1, so they exchange the item. This trade only happens at that price if it benefits both of them: Bob would prefer the apple, and Sally would prefer the money, so by trading, both the buyer and the seller benefit.

Imposing a control on the price of apples would be deeply unfair to Sally: it steals the value of the apples that Sally already owns, and hopes to sell. This has a follow-on effect of crushing the value of her farm, machinery and labour. Those apples – which our imaginary Sally has worked to grow – have an estimated value roughly equal to what Sally can sell them for (the exact current value is slightly less than this, as the sales are uncertain, they’re in the future, and there are various costs to storing and selling the apples, but they don’t really matter here). By imposing a price control to lower the future price of apples, Sally has her existing value stolen from her. This is why price controls are, first and foremost, unfair – they take value away from Sally.

Secondly, imposing price controls will create scarcity and won’t achieve their stated aim of making Bob the buyer’s life better either. Cutting the amount that Sally the seller can earn from apples in the future, Sally is discouraged from making more apples. This will then harm Bob, because next season, there will be less apples for Bob to buy – and if there’s more demand for apples than supply, the limited apples will need to be rationed in some manner. Thus, imposing price controls creates scarcity.

While this just a simple and imaginary story showing the harm of price controls, the real life experience of price controls shows exactly this pattern of events. A couple of high profile examples of this include Richard Nixon’s failed attempts to impose price controls on fuel, causing rationing through long queues almost 50 years ago. Similarly, the recent price control crisis in Venezuela featured price controls on basic home supplies, causing shortages in even things as simple as toilet paper.

What’s the alternative? The alternative is to let prices work: to let the price of things fluctuate according to supply and demand. As prices increase, there is greater incentive for Sally to make more apples – and further, for Chris the competitor to start growing apples too. A competitive market economy will then give Bob more choice, and cause supply to adjust dynamically according to demand.

One thought on “Price Controls Are a Bad Idea

  1. Price controls have both supply and demand impacts, not just supply as stated. You can have situations where a price control can result in excess supply over demand. Agriculture policies have traditionally been examples of this, where prices are set to high, which reduces the demand for the good. Normally in those cases a government would buy the excess.

    Price controls do tend to be negative and it is difficult to find examples where they are successful, outside of public goods and/or where externalities impact the real price of a good or service.

    Like

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