An Ancient Fallacy: Price Controls
by Thomas Sowell
(June 27, 2002)
When Hawaii recently passed a law controlling how high the price of gasoline can go in that state, it was the first law controlling the price of gasoline since 1981, when President Ronald Reagan ended federal control over oil prices. What was unusual about the Hawaiian price controls is that they do not go into effect until 2004.
If price control is such a great idea, why postpone its benefits for two years? The only reason that makes sense is that the public thinks price control is a great idea, but the politicians know its bad consequences, and they don't want those bad consequences to show up before this year's election.
By postponing the date when the law goes into effect, politicians can reap the benefits of doing something the public likes without reaping the whirlwind of voter disenchantment when this attempt at getting something for nothing turns out to be as counterproductive as price caps on electricity in California.
Already an oil refiner in Hawaii has begun talking about shipping his gasoline to the west coast of the U.S. mainland, after price controls go into effect in Hawaii -- which of course will mean less gasoline for Hawaiian motorists. Whenever and wherever government controls have been put into effect to hold down prices, the most common consequence has been a reduction in the quantity supplied.
Those old enough to remember the gasoline crisis of 1979 may recall sitting in long lines of cars at filling stations, waiting -- sometimes for hours -- to reach the pump. This was one of the most common consequences of price control throughout history -- a shortage. Yet how many Americans ever made the connection between the price controls of the 1970s and the gasoline shortages of the 1970s? How many have noticed that they haven't been waiting in gasoline lines since Ronald Reagan got rid of the price controls on oil?
Why do price controls cause shortages? There are basically two reasons: supply and demand.
People will not supply as much at a lower price as they will at a higher price. Some oil wells that will repay their costs and earn a profit when the price of oil is $25 a barrel will not cover their costs when the price is $15 a barrel. Some people who will rent out a bungalow in their backyard when rents are high will not bother when rents are low. Some farmers will give up farming when food prices are kept below the point where they can earn a living.
On the demand side, people will demand more when the price is kept artificially low by price controls. Before rent control laws were passed in Sweden, less than one-fourth of unmarried adults there had their own separate housing units, but afterwards more than half did. People buy more of anything that is cheaper. With more being demanded and less being supplied, shortages are inevitable, whether with housing, food, medical care or whatever.
It is not just the quantity supplied that declines under price controls. Quality also declines.
When there are more people trying to rent apartments than there are apartments for rent, landlords no longer have to maintain the appearance of their buildings. They do not need to pay for painting, repairs or maintenance as often as they did when there was no housing shortage and they needed to attract tenants.
Sometimes quality deterioration takes the form of waiting -- not just cars waiting in line at filling stations, but also sick people remaining on waiting lists for months to get surgery or other medical treatment they need. Cheap medical care is one of the most expensive things there is.
So long as politicians can create the illusion of something for nothing, that gets them votes, which is what it is all about, as far as they are concerned. Hawaiian politicians have the best of all worlds with immediate credit for price controls and a postponement of the consequences till after they are re-elected.
Thomas Sowell has published a large volume of writing. His dozen books, as well as numerous articles and essays, cover a wide range of topics, from classic economic theory to judicial activism, from civil rights to choosing the right college.
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