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Price Controls - Looks Good. Feels Bad (Vol. 47)

mse | Apr 13, 2022

The Government Cure-All That Never Works...

General inflation is a big problem for everyone today, especially for people in the lower income levels. It is primarily a result of monetary policy, with the supply of money increasing faster than the supply of goods and services. We discussed this in No Spin #27 and No Spin #39.

 

Changes in prices for any given commodity are always occurring as supply and demand factors affect prices, both up and down. This can be natural changes as a result of supply and/or demand changes, or it can be artificially induced by various factors, such as government policy.  

 

THE CRITICAL POINT IS THAT PRICE CHANGES ARE NEEDED TO BALANCE SUPPLY AND DEMAND, REGARDLESS OF THE CAUSE.  This is the natural operation in a market economy - and it works. As a result of public outcries or a desire to just help, some politicians  look for easy solutions to price inflation - price controls. LOOKS GOOD, FEELS BAD.

 

Price controls do more harm than good - why? When you force a price to be below the market price, the demand is higher than the supply. When more is demanded than supplied, there is a shortage. And if the price is below the cost to produce, then none would be produced. Does that solve the problem? No, that just means that some demand would not be fulfilled, and who do you think would come up short? We discussed this phenomenon in No Spin #7 on Rent Controls.

 

This often leads to illegal black markets, where producers can sell at market prices at which they can make a profit. This will dry up the artificially controlled market and no one can get what they want in the ‘controlled’ market. And the black market will have a higher price, or it would not exist.   

 

BOTTOM LINE

 

Price controls do not increase the supply of goods, and they often reduce the supply. It may satisfy a politician’s desire to ‘do something’ for the public, but is terribly misguided and just does not work, so don’t do that. (For explanation of supply and demand curves, see Video #5 under In-depth Look at Economics Series here.

 

If politicians really want to help, they need to stop interfering with the markets, lower regulations, and encourage lower costs and freedom to produce. The productive sector will figure it out.  

 

LEARN ECONOMICS, THEN VOTE SMART