7. Price Controls
Price controls are the political solution enacted
to stop price inflation.
[See
Chapter 21
for an explanation of the cause of inflation.]
The controls do not work. Prices are determined
by supply (willingness and ability to sell) and demand (willingness and
ability to buy). The price resulting from supply and demand which
clears the market is not changed by a price control (a legal limit on price).
The legal price is merely a misstatement of the actual conditions and is
comparable to plugging a thermometer so that it never can read greater
than 72 degrees even though the actual temperature may be higher.
The law of supply and demand cannot be repealed.
People will call for price controls as a way
to make goods available cheaper than they otherwise would be. The
price controls do not make the goods cheaper and in fact cause a shortage
of those goods as the demand quantity will be greater than the supply quantity.
Not only do price controls cause shortages but they in fact make goods
MORE expensive!
How can this be? The shortage resulting
from the price controls causes consumers to pay for the good in question
in ways other than a price payment to the seller. To take an example
from the experience in the U.S.: the price of gasoline was legally limited
between August 1971 and February 1981. At a time when gasoline could
not be legally sold for more than 40 cents a gallon, the estimated free
market -- supply and demand -- clearing price was 80 cents a gallon.
Using a ten-gallon fill-up it would appear that the consumer is saving
$4.00 per tank full (10 gallons x 80 cents versus 40 cents). While
consumers are not paying as much to the seller for the gasoline directly,
they are in fact paying dearly for the gasoline in other ways.
Probably the greatest expense is in the form
of the consumer's time. The shortage results in extensive time spent
waiting in line for the purchase. Time is money; a consumer's time
has value. Using a minimum figure of the consumer's time being worth
$2.00 per hour, a two-hour wait in line per fill-up wipes out any alleged
saving from the price controls. But the consumer is not through paying.
The idled gasoline used waiting in line is another form of consumer payment,
say 10 cents per fill-up. Now we have the price controls actually
costing the consumer an extra 10 cents per tank full. And there are
yet more costs to the consumer. There is a difficulty in buying gasoline
when there is a shortage in that it takes extra mental energy and planning
which is an aggravation (that is, a cost) for the consumer he would much
rather avoid. (Doubt this last point? Check your own behavior:
Do you call around to the gas stations in your area before stopping for
a fill-up, or do you avoid that aggravation although you know that not
checking will often result in paying a higher price than necessary?)
These extra expenses continue in the form of
the violence and the fear of such violence that can result from tensions
mounting while waiting in long lines for gasoline (shootings did occur
in this situation during the 1970's price controls). Other expenses
might include the purchase of a siphon hose for legitimate or even illegitimate
gasoline transfers from one vehicle to another. Also, siphoning gasoline
carries its own severe health and safety costs when poorly executed!
The fact that there is more demand than supply
of gasoline generates a further consumer cost in reversing the normal buyer-seller
relationship. The normal buyer-seller relationship is one of the
seller courting the consumer, attempting to please the consumer as a means
to the seller's financial success. But with the price control-induced
shortage it is the buyer who must please the seller to be among the favored
whom the seller blesses with his limited stock of goods! In the 1970's
this reversal was played out as sellers dropped services from their routine
-- no more tire pressure checks, oil checks, windshield cleaning, etc.
All of these further consumer costs only make
the expense of gasoline that much greater than the free market price.
Consumers have the choice of paying the free market price for gasoline
in dollars directly to the seller or paying an even higher controlled price
in a combination of dollars and other costs. But there is a difference
in these two forms of payment for gasoline. The difference is that
the direct dollar payment to the seller is an inducement to supply gasoline.
The payment by the consumer in other costs encourages no such supply.
-
Block, Walter, editor
Rent Control, Myths & Realities,
(Vancouver, British Columbia: The Fraser Institute, 1981)
-
Katz, Howard
The Paper Aristocracy,
(New York: Books in Focus, Inc., 1976)
pp. 113 - 115, 117
-
Reisman, George
The Government Against the Economy,
(Ottawa, Illinois: Caroline House Publishers, Inc., 1979)
pp. 63 - 148
-
Rothbard, Murray N.
Man, Economy, and State,
(Los Angeles: Nash Publishing, 1970)
pp. 528 - 550
-
Schuettinger, Robert and Eamonn F. Butler
Forty Centuries of Wage and Price Control: How Not to Fight Inflation,
(Washington, D.C.: The Heritage Foundation, 1979)
-
Skousen, Mark
Playing the Price Controls Game,
(New Rochelle, New York: Arlington House Publishers, 1977)
pp. 67 0 86, 109 - 126
|