Thoughts On Price Controls

From Don Boudreaux of Cafe Hayek.

"Amy Chen – a high-school senior in Oakland – e-mails me:

My teacher gave my group and I the assignment of debating another group that will take the side that government should stop sellers from raising prices when earthquakes and big natural disasters happen. My dad likes your blog and suggested I ask for your advice.

I sent Ms. Chen a link to Hugh Rockoff’s Concise Encyclopedia essay entitled “Price Controls,” as well as a link to Art Carden’s 2011 Forbes essay “Price Gouging Laws Hurt Storm Victims.”  I also offered to talk with Ms. Chen by phone about this matter, as there’s much to say beyond pointing out that price ceilings will cause shortages of the very goods and services that the legislation is ostensibly aimed at making more available.  But here’s my summary of what I will say to her if she calls:

- price ceilings (on, say, plywood) cause the quantities of plywood that buyers want to buy to be higher than the quantities that sellers are willing to sell; the result is a shortage of plywood;

- the shortage of plywood means that some means of rationing are necessary to determine who gets the available supplies of plywood;

- a common means of rationing is queuing; queuing is costly; the people waiting in long lines are spending valuable time in an effort to increase their prospects of being among the lucky ones who actually get some plywood; so the actual cost to plywood buyers is not the government-mandated price; rather, it’s that price plus the value of the time and effort that was spent to get the plywood;


- another means of rationing is to distribute the good according to political, professional, and personal connections; a hardware-store manager is more likely, with price controls in place, to hold several sheets of plywood aside to be given as gifts or sold to his brother, the mayor of the town, or building contractor who this hardware-store manager plans to hire to refurbish his kitchen;

- price controls spawn black markets; the hardware-store owner might, instead of holding some sheets of plywood aside for his brother (who wants to rebuild a doghouse destroyed by the earthquake), sell plywood on the black market at prices above not only the state-mandated maximum, but above what would be the high market price in the absence of price controls;

- price controls also cause the quality of goods and services to fall; sellers with more buyers than they can possibly serve at existing prices are under less competitive pressure to maintain the quality of the products they sell and the service they offer;

- price controls, by reducing the quantities of plywood actually brought to market, reduce the quantities of plywood that people in this market actually get – reduce it relative to the amount of plywood they would get in the absence of price controls;


- price controls, by reducing the quantities of plywood actually brought to market, raise the market value of each sheet of plywood to levels higher than it would be without price controls; without price controls the market value of each sheet of plywood would be the equilibrium price, but with price controls, the market value of each sheet of plywood is made to be higher than that equilibrium price;

- the amount that people are willing to pay to acquire plywood is shown by the market value of plywood; because a price ceiling on plywood causes the market value of plywood to rise to heights above what the explicit, market price of plywood would be without price controls, price controls cause the total value of resources that people spend to acquire each sheet of available plywood to be greater than they would spend per sheet without price controls – that is, price controls actually raise the price of plywood;

- prices set on markets reflect underlying economic realities; price controls – such as price ceilings on plywood and minimum wages imposed statutorily – are government mandates that force prices to lie about underlying economic realities; rather than lower the cost and increase the availability of plywood, price controls on plywood raise the cost and decrease the availability of plywood by sending out false reports about the true state of the availability and value of plywood; a price ceiling on plywood no more makes plywood less costly for consumers than does a king’s order to kill the messenger change the truth of the messenger’s message that the king’s army suffered a crushing defeat on the battlefield;

- those who complain about higher prices seldom do anything other than complain about higher prices (save, in many cases, actually contributing to the rising prices by being among the consumers seeking to buy the good or service in question); however dastardly it might be for a hardware-store owner to raise the prices he charges for plywood, he at least is doing something to bring a much-needed product to consumers, while the complainers are doing absolutely nothing constructive to bring plywood to consumers; the complainers aren’t willing to supply plywood to consumers even at prices well above the prices that the complainers insist are ‘unfairly’ high;

- rising prices are no more caused, in any meaningful or relevant sense, by “greed” or self-interest than is the death of someone who falls from the top floor of the Empire State Building caused by gravity; the relevant cause must be something that changed; rising prices are caused by either rising consumer demand or falling supplies or by some combination of both – and, in the immediate aftermaths of natural disasters, there is both a significant rise in demand and a fall in supplies (in part because of disruption of supply lines);

- if anyone nevertheless childishly insists on blaming rising prices on “greed,” then greedy consumers even more than greedy merchants should be blamed for rising prices; hardware stores that, after an earthquake strikes, double or triple the prices they charge for plywood do so only because lots of consumers are willing to pay those much-higher prices; so each consumer who, when buying higher-priced sheets of plywood, complains about the “greed” of others ought to look past the merchants who sell the plywood – those who complain should look to the other consumers who are “greedily” offering to pay lots more for plywood, thus enabling hardware-store owners to successfully raise the prices they charge for plywood; without those “greedy” consumers whose gluttony for plywood is so great that they’re willing to pay very high prices for it, the prices of plywood would not rise."