What Will Price Controls On Insurance Do?

President Obama suggested that regulations limit the size of increases in insurance premiums. Tyler Cowen at Marginal Revolution points out that "If current proposals fail to pass, insurance companies can still just dump people. Forcing them to lower their prices will induce them to dump even more people and to have a tighter definition of preexisting conditions."

At Regulating a Natural Monopoly I show that marginal cost price regulation and a subsidy is the best policy using the concept of social welfare. So there is a case where regulations work. But I don't think that the insurance industry fits the definition of a natural monopoly. It would have to have big economies of scale, meaning that their average cost falls with each additional customer. I have never heard that that is true. Usually price ceilings cause shortages.