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Why Price Controls Inevitably Lead to Shortages
Letting the government set the cost of products always backfires
Michelle Tandler is a liberal from San Francisco who has gotten a lot of attention for being willing to point out that the emperor has no clothes in that city. Liberals don’t care if conservatives like you or me criticize how the city is run, but when a quasi-prominent liberal from San Francisco started loudly pointing out that their policies on crime and homelessness are abject failures, it aggravated the Left in San Fran. Tandler is definitely a leftie, but dogfighting with the crazy Left in that city has increasingly moved her to the center-left. Recently, she posted this:
This is a subject worth discussing because there genuinely are an awful lot of people in this country, particularly on the Left, that don’t understand the problem with price controls – and why would they? Do they teach it in most high schools? Does the mainstream media explain the concept? Are you ever going to see liberal politicians tell the truth about this? Do most people own a business, which would, almost by default, help them to understand this concept?
People who don’t understand the concept may not get why it’s a problem to just say, “Well, I don’t think anyone should have to pay more than X dollars for a product, so let’s set the price there.” To explain why this is an issue, we need to get back to first principles. Let’s start with an extremely simple example.
Let’s say you make money by going to yard sales, buying purses, and then selling them on eBay. A lot of people do that kind of thing these days. You buy those purses at yard sales for $10 each on average and, after expenses, you make $25 in profit for each one you sell. It’s a little bit of a hassle, but if you sell 12 of them per month on eBay, that’s an extra $300 per month. Not terrible, right?
Unfortunately for you, the local government passes the, “Everyone Deserves a Cheap Purse Act” and that law sets the max amount a purse can be sold for on eBay at $15. Suddenly, your situation has drastically changed. For one thing, it may have been worth your time to sell those purses to make $300 per month, but if you sell 12 purses at only $15 per month, that means you’re only going to make $60 in profit for your efforts. Is it still worth your time to do it at all? That’s debatable. Even if you decide that it is, your profit margin is much smaller and it’s possible it could quickly evaporate entirely. If the cost of buying purses at yard sales increases to $15 per month, you make zero profit selling them on eBay. So, what are you going to do? You’re going to stop selling purses. Other people are going to do the same thing and guess what? The supply of purses on eBay will plunge.
You can see this happens very quickly in the real world when there’s a gas shortage somewhere. For example, after Hurricane Dorian in 2019, there was flooding and trees down in areas all around North Myrtle Beach. That made it very difficult for gas trucks to make deliveries here for a few days. That led to the gas supply temporarily being very limited. In a world where anti-gouging laws didn’t exist, the cost of gas would have probably gone up to $20, $30, $40 per gallon, only people that desperately needed fuel would have paid that price and the very limited supply of gas would have been stretched out for a few days. However, since we do have anti-gouging laws that prevent gas stations from raising their prices in situations like that, gas was quickly sold out everywhere and it was impossible to get for a few days.
Think about this in terms of rent control. Let’s use a little bit of a ridiculous scenario to hammer the point home. Let’s say the cost of two-bedroom apartments in Manhattan was set at $1 per year. How much demand would there be for those apartments? Absolutely off the charts, right? At a minimum, there would likely be tens of thousands of people trying to get each apartment. Now, how much money would the landlords that owned those apartments make if they rented them out for a dollar each? They wouldn’t make any money. They’d lose a lot on each apartment. Now, here’s the key part. How many people would be willing to build more apartments that they could only rent out to people for a dollar per year? None. Nada. Zilch. Zero. People don’t go through the trouble of building or buying homes, dealing with the repairs, and hassling with tenants out of the goodness of their hearts, they do it to make money. If the money is not worth it or worse yet, there’s no profit at all, they’re not going to do it.
The market naturally handles these kinds of decisions in a better, fairer, and more accurate manner than any human being ever could. Imagine living in a small, isolated farming town with a hundred people in it and every, last one of them has at least a dozen chickens. Almost everyone has enough eggs, and some people have dozens more eggs than they can eat. If you’re one of these people and decide to go into business selling eggs, how are you going to do? Not very well, right? Because the demand for eggs is going to be extremely low while the supply of eggs is enormous. On the other hand, imagine the same situation, but you are the ONLY person in the whole area with chickens. How are you going to do selling eggs in that case? Probably pretty well, right? If a lot of people want eggs and you’re the only game in town, you’re going to be able to charge a premium.
The same phenomenon plays out with price controls. Initially, an artificially low-price leads to high demand for the product that’s in stock, but that same artificially low price dissuades more people from producing that same product. In other words, it leads to a dramatically reduced supply. Normally, when a case like that plays out in the free market, prices for the product rise, supply rises to meet demand and then the price often drops significantly over time as competition picks up. When prices are controlled and thus taken out of that equation, the market may try to get around this problem by decreasing the quality of the product or creating a black market for it, but mostly, you just get shortages. This plays out in the same predictable way over and over again.
If there are price controls on power, it will lead to blackouts. If you put price controls on housing, there will be a shortage of housing and the housing that is available will be incredibly expensive. If you put price controls on food, the shelves will soon be empty. If you put it on gas, it will mean long lines and make gas hard to come by.
This is something that has played out over and over again in different countries across different time periods. This is not really debatable… well, I guess everything is debatable if you’re dumb or dishonest enough, but this is like saying the grass is green, the sky is blue, the water is wet, and you are too after you get pushed in the pool.
So, why does this issue keep coming up again? It’s not because there’s some kind of well-reasoned, well-thought-out, economics-based argument for price controls. It’s because people like paying less for things they want, and politicians like to do things that will help them get elected as long as they can shift the blame to someone else when it goes south. This is doubly ironic because often, it’s bad government policies that cause prices to explode in the first place and then the “fix” offered is for the government to step in again with “price controls.” The free market is not a panacea, but the more government interference you get in it via price control, the worse it inevitably gets.