Price controls

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Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternately, to insure an income for providers of certain goods. There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged.

Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.

This type of policy dates to the Old Testament, in which Israelites were instructed not to charge interest to other Israelites.[1] It was tried during the Roman Empire.[2]

Price controls have also been used in modern times for such things as rent control in New York City and usury laws.[1] Although they have been resorted to often, economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided.[1]

States have sometimes chosen to implement their own control policies. California controls the prices of electricity within the state, which economist Thomas Sowell blames for the occasional electricity shortages the state experiences.[3] Sowell said of California's controls in 2001: "Since the utility companies have been paying more for electricity than they were allowed to charge their customers, they were operating in the red and the financial markets are downgrading their bonds."[3] California's price-setting board has agreed to raise rates, but not as much as the companies were paying on the wholesale market for their electricity.[4] Economist Lawrence Makovich contended, "We've already seen in California that price caps on retail rates increased demand and made the shortage worse and price caps also forced the largest utility, Pacific Gas and Electric, into bankruptcy in four months."[5] While some charged that electricity providers had in past years charged above-market rates,[5] in 2002 the San Francisco Chronicle reported that before the blackouts, many energy providers left the state because they could make a greater profit in other Western states.[6] The Federal Energy Regulatory Commission stepped in and set price caps for each megawatt of power bought, after lifting the caps to avoid rolling blackouts six months previously.[6]

The state of Hawaii briefly introduced a cap on the wholesale price of gasoline in an effort to fight "price gouging" in that state in 2005. Because it was widely seen as too soft and ineffective, it was repealed shortly thereafter.

Criticisms

The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product.[7] For example, Lactantius wrote that Diocletian "by various taxes he had made all things exceedingly expensive, attempted by a law to limit their prices. Then much blood [of merchants] was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the [maximum] law, after having proved destructive to many people, was from mere necessity abolished."[8] As with Diocletian's Edict on Maximum Prices, shortages lead to black markets where prices for the same good exceed those of an uncontrolled market.[7] Furthermore, once controls are removed, prices will immediately increase, which can temporarily shock the economic system.[7]

A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973 and March 17, 1974. Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed [9] because of a shortage of fuel at the low price set by the U.S. Cost of Living Council. The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared. It made no difference whether prices were voluntarily or involuntarily posted below the market clearing price. Scarcity resulted in either case. Price controls fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but such controls do manage to reduce supply.[10][11] When price controls on gasoline were lifted, the shortage ended and the long lines of cars at gas pumps disappeared.

Nobel prize winner Milton Friedman said "We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas."[12]

Nixon's Secretary of the Treasury, George Shultz, enacting Nixon's "New Economic Policy," lifted price controls that had begun in 1971. This lifting of price controls resulted in a rapid increase in prices. Price freezes were reestablished five months later.[13]

References

  1. a b c Rockoff, Hugh. . . http://www.econlib.org/library/Enc/PriceControls.html. Retrieved 2008-11-03. 
  2. Rothbard, Murray. "Price Controls Are Back!". Making Economic Sense. http://freedomkeys.com/pricecontrols5.htm. Retrieved 2008-11-03.
  3. a b Sowell, Thomas (2001-01-11). . Capitalism Magazine. http://www.capmag.com/article.asp?ID=86. Retrieved 2008-11-03. 
  4. . NewsHour with Jim Lehrer. 2001-01-04. http://www.pbs.org/newshour/bb/business/jan-june01/california_1-4_audio.html. Retrieved 2008-11-06. 
  5. a b . NewsHour with Jim Lehrer. 2001-06-20. http://www.pbs.org/newshour/bb/environment/jan-june01/energy_6-20.html. Retrieved 2008-11-06. 
  6. a b Martin, Mark (2002-05-10). . San Francisco Chronicle. http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/05/10/MN24643.DTL. Retrieved 2008-11-06. 
  7. a b c Walter J. Wessels, Economics‎ (2000), p. 232-33.
  8. Lucius Caecilius Firmianus Lactantius (ca. 300). . . http://www.ccel.org/ccel/schaff/anf07.iii.v.vii.html. 
  9. 1973 oil crisis
  10. Taylor and Van Doren, pages 26-28
  11. Thomas Sowell, Applied Economics: Thinking Beyond Stage One (2008), pages 7-9, 112-113, ISBN 0465003451
  12. "Controls blamed for U.S. energy woes", Los Angeles Times, February 13, 1977, Milton Friedman press conference in Los Angeles.
  13. "History of the Treasury: George P. Shultz". United States Department of the Treasury, Office of the Curator. 2001. http://www.ustreas.gov/education/history/secretaries/gpschultz.shtml. Retrieved 2009-02-12.

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