Economics and Free Markets by Howard Baetjer

Author:Howard Baetjer
Language: eng
Format: epub
Publisher: CATO Institute
Published: 2017-04-30T16:00:00+00:00

9

The Problems with Price Controls

Consequences of Interfering with Free-Market Pricing Price controls are pieces of legislation that set either lower limits or upper limits—floors or ceilings—on legally permissible prices. Their purpose is generally to protect some group in society from prices the legislators find to be “too high” or “too low” for some reason. Rent controls, for example, are price ceilings that aim to protect tenants from market-clearing rent levels that are considered “too high.” Anti-price-gouging laws (sometimes passed after natural disasters, as we will see) similarly aim to protect buyers from prices that are “too high.” Minimum-wage laws are price floors that aim to protect workers from wages that are “too low.” Milk price supports are price floors that aim to protect dairy farmers from prices that are “too low.”

These legislated restrictions on the free movement of prices all have the unintended consequence of reducing economic coordination. They prevent markets from clearing. Price ceilings cause shortages; price floors cause surpluses. Those shortages and surpluses hurt some of the very people who are supposed to be helped by price controls.

Consider rent controls, for example (Figure 9.1). Suppose in a particular city the market for two-bedroom apartments would clear at $500 a month, but rents are restricted to no more than $400 a month. At that rental rate, the number of apartments people would like to rent (the quantity demanded) would exceed the number made available (the quantity supplied). The difference is the magnitude of the shortage of apartments the rent control would cause.

Figure 9.1

Example of Rent Control: Market for Two-Bedroom Apartments

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