Price Controls


It is a fact that every politician and head of state has 2 responsibilities, and 2 responsibilities only; to get in power and stay in power.  That is the only explanation as to why they continue to fight for and pass price controls despite the mountains of evidence saying price controls never work and only hurt the people it supposedly helps.  The apparent good intentions of the politician often score points amongst their constituents regardless of the results of the politician’s actions.

I read this article earlier today.  It is about the toilet paper shortage in Venezuela but it also mentions that they have had shortages of milk, butter, coffee, and cornmeal.  The shortage is the result of artificial price ceilings brought to you by the Venezuelan government. The stated reason these price controls were implemented was to help the poor be able to more afford their basic needs.  While that sounds like a great idea, after all, no one wouldn’t be against helping the poor, these shortages should have been expected.

Our resources (time, labor, raw materials, etc.) are scarce.  That does not mean that we are in danger of running out of resources, it just means that we do not have an unlimited supply.  If we choose to use a ton of steel to make a bridge, we cannot use that same ton of steel to build a skyscraper.  If we choose to use a piece of wood to make a baseball bat, we cannot use that same piece of wood to make a table, unless you recycled the bat.  How could we ever decide the proper way to allocate all our resources the most efficient way to produce the right amount of goods for the people who demand it?  The is much simpler than a few bureaucrats telling us how to distribute millions of resources….the answer is free market prices.

With billions of people independently, yet unknowingly, working together, we find the correct price for a good or service.  If the price of a gallon of gas is $3.44 at your local gas station, that is because the gas station would not make as much money if it sold the gas at a lower or higher price.  If $3.44 was higher than the market demanded, they would not sell enough gas to make the most amount of profit and the market would force them to lower the price so they sell enough gas to make money.  If that price was way below the fair market price, they would sell out too quickly and not produce the maximum profit.

So how does a price tell us how to allocate our resources?  Well say you opened an ice cream store that sold 2 flavors, vanilla and chocolate for $1 a cone.  After you were in business for a few days you see that almost all your customers are buying vanilla and very few are buying chocolate.  At the end of every day you end up turning customers away because you do not have enough vanilla and you throw away the left over chocolate that wasn’t sold.  The market is telling you to stop producing chocolate (at least not in the same quantity you currently are) and produce more vanilla.  You would even be able to raise the price of vanilla and lower the price of chocolate.  You’d find that some people might not want the vanilla for $1.50 a cone, but would buy the chocolate for .80 a cone. In a competitive market, when prices rise more is produced.

It doesn’t take an advanced degree to understand that if a candy bar typically sells for .50 in a free market, and law is passed requiring candy bars to be sold for $1, more people would start producing candy bars and we would have a surplus of candy bars.  The opposite is true if the price is artificially low. If the law says candy bars must be sold for .30, fewer producers would find it worth their time and effort to sell candy bars and we would have a shortage, even if the politicians that passed the law said it is to help the poor.  The end result is that fewer people get the candy bars they want or need.

This was a difficult article to write because an entire book would be required to expand on the topic.  What needs to be understood is that lower prices, whether from the market or from the government, mean that less of that good or service will be produced because people could earn more money producing or doing other things.  Politicians know and understand this, but it is easy to buy votes from people by setting a minimum wage or a low price on toilet paper.  Even if it causes shortages, the uneducated people will say you care and cast their vote.  That is why the world will continue to see shortages far into the future.

God Bless Freedom, Liberty, and Personal Property,

Slappy Jones II