The Moral Case Against Price Controls

We approached price controls from an economic standpoint on Monday… and today we’re going to follow up with the completely opposite side of the coin (as if you could be ‘completely’ opposite on a thin object…).  That’s right – I’m going to make a moral case why price controls are wrong.

What?  Why?

At some point in discussing controversial topics such as price gouging and price controls you switch phases.  The first stage, of course, is an objective analysis about why some thing or some policy is worth its weight economically, or at least worth the known tradeoffs.  Stage two of a discussion is usually ushered in during an emotional stage – where one party to the conversation will make the argument that it isn’t simply a question of numbers, but instead it is a question of “what’s the right thing to do” or, perhaps, what is “morally correct“.

So – what if there is a moral reason to do some things?  Let’s assume, for the sake of argument, that you could even find a common set of morals in a large enough subset of the population.  Morals then would be defined as a societal or religious framework for categorizing decisions, thoughts and actions as either “good” or “bad” (most recently, Catholic morality was in the public eye when Representative Paul Ryan discussed morality with regards to the budgeting process).  Even if you don’t think such a framework exists, note that society generally agrees on things such as helping the truly helpless and has a pretty strong shared view of what things should be illegal.  I’d wager that if you really thought about it, you could at least point to some things society feels are wrong, even if you don’t personally agree (or know someone who doesn’t).

The Moral Case For Price Controls

The moral case for price controls has been well defined.  Roughly, some vulnerable segment of the population will never afford/succeed/achieve something unless some lower threshold on some good or service is set by the only entity that can set it (Government).  That could be anything – from price ceilings on pharmaceuticals like the Monday piece, price ceilings on generators and gasoline after a hurricane, price floors on milk, guaranteed buyers of corn, even minimum wages.

The Flip Side – The Moral Argument Against Price Controls

The problem?  Well, actually, the problems have been well-defined.  From cash strapped seniors to living wages, the arguments for price controls are as varied as the price controls we have in place.  The problem?  The prescription we have given to fix the problems.

That’s right – think about this logically.  In every price control example I’ve given, the problem was identified but the problem is supposed to be fixed in the same industry where the problem arises!  That’s right – since the elderly can hardly afford prescription drugs, pharmaceutical companies must make up the difference.  Since there is huge demand after a natural disaster, home improvement stores and gas stations have to sell products at a price set by fiat.  Since it’s hard to afford to survive on low wages, companies and industries that traditionally pay low wages need to make up the gaps.

Okay, we’re ready now.  Let’s look at the moral case we’re ignoring – the provider of the service or the seller of the goods, and the spiral of politics and demand which leads us to the breaking point.

Let’s pretend that you’re a bright-eyed recently graduated Art Major and you are very good at producing oil paintings on fiberglass.  You’re so good, in fact, that you start to experience incredible amounts of demand for your fiberglass paintings.

You try to keep up with the massive demand, but as more and more of the population buys your

IF YOU DON’T BUY ONE YOU’LL NEVER GET A GOOD JOB!

paintings there’s a feeling that you’ve got a MUST HAVE PRODUCT.  You can’t have a seat at the societal table unless you’ve got one of those paintings – it’s considered a gateway to the middle class.  Competitors spring up, but no one can satiate the massive demand.

What happens next?  Well, politics start to boil over.  Prices have been rising in the face of demand, so government starts to subsidize your product.  That’s great and all – but the massive competition has started to reduce profit margins even as the paintings themselves grow larger and more ostentatious.  Congratulations – you started an industry which produces a product people now feel entitled too.

Unfortunately, the demand and the competition only serve to drive up prices on the paintings even with the narrowing prices.  Government is starting to wonder what it is getting for its investments, and you start to get phone calls  from state and federal politicians complaining about the prices.  There are protests in the streets demanding that you refund people who don’t like the style of picture they purchased in fair transactions, and people are striking out at Government loans they took out for the pictures (and now feel are too onerous).

The next step?  Yes, it’s here.  The government sets a maximum price on your paintings.  They audit your books and set a price level “which is ample“.  Some of your competitors saw the writing on the wall and got out – but you’re still in the game.  Any overtures towards leaving the industry are met by offers you can’t refuse from the Government – “if you don’t sell to this market, you can’t sell your other products to us”, “if you don’t acquiesce to these demands we’ll have to look into that regulation that we shelved”, “what’s up with your taxes three years ago?” and the like.

So, that’s it – you’re stuck in the game with massive regulations, restrictions, subsidies, and price controls.  All you can do is lobby for an ever shrinking pie, but your once-killer-app is now a middle class entitlement, so the burden is on you to provide it at whatever cost you are told to.  Congratulations; you’re living the American Dream… however, you are no longer bright-eyed.

Targeted Costs vs. Share Costs

The biggest issue with price controls is the targeted costs which they impose on the provider of the very thing that is in demand!  Instead of all of society sharing in the costs to provide necessities to the population, we wrongly force one subset of society to bear all of the burden of the a diagnosed problem.  This is completely unfair to the provider of goods and services.  Why should our friend the young Art Student have to provide her art at a discounted cost because people are demanding it loudly?  Why should industries that can’t afford the costs have to hire more employees at higher wages?

Now, don’t get me wrong – I’m willing to have the discussion about which problems are truly morally right to fix and need fixing.  In fact, we’ve argued on this site in favor of removing all social programs and replacing them with a negative income tax (in the mold of, but not exactly like the current Earned Income Tax).  We’re the last site which would argue that society has solved every problem – what we disagree with is how society has gone about ‘fixing’ those problems.  In fact, we at DQYDJ think that the patches we have made are causing even bigger problems down the road.

So, yes, there is a moral case against the price controls that society has enacted in conjunction with growing Social Programs.  Funny how that works, isn’t it?  Let’s hear your thoughts on this matter – math-free or math-filled!

 

Tweet about this on Twitter4Share on Facebook1Share on Google+0Share on Reddit0Share on StumbleUpon0Email this to someone

Comments

  1. CameronDaniels says

    This is another case where the true incidence of a policy is difficult to determine. Gas taxes, medical subsidies (or taxes) and other market “corrections” (such as the Durbin Act which led to BoA’s controversial debit card fee) are applied across all groups involved in the industry: consumers, producers, investors and employees.

    Price caps or floors can be argued to apply to all of the different stakeholders in the industry. Producers, investors and employees can be analogously affected by losing the producer surplus that would arise from allowing prices to float. Consumers, on the other hand, are affected in a different way. Instead of allowing consumers who truly require the product to gain access to the market, long lines and gas shortages arise. Many other articles have been written about how on/off days (such as even/odd license plates) are inefficacious.

    A simple thought experiment: If you believe producers should not be allowed to rise prices in certain times because they could collude and set the price too high, what is to prevent them from doing this every day? Producers every day (that is not close to a hurricane) have the ability to set whatever price they want, yet they choose not to. Why is this?

    http://dqydj.net/tax-incidence/

    • says

      In most of these I’d guess the bulk of the incidence is on the remainder of the customers. Take price controls on medicine – more of a foreign country thing, but the incidence is planted firmly on the US.

  2. says

    You really knocked it out of the park with both posts this week PK! Great, great stuff! I don’t really have anything substantial to add. You pretty much covered everything and I agree with all of it. My only hope is that some liberals stumble upon these articles and see how you rationally explain how free markets prevail and government control and regulation only leads to demise.

    • says

      Thanks! I’ve been saving those up for a while (since all of the annoying anti-gouging pieces started showing up in media pieces.).

      A caveat – this material isn’t really targeted at either side. If you recall, Governor Christie’s policy of dividing gas by license plates was almost as bad as Bloomberg and Cuomo. And, don’t forget – Republicans are the party of farm subsidies.

      Plenty of blame to go around!

  3. 101 Centavos says

    You’d thing that the resounding success of rent-controlled apartments in large cities would be example enough.
    I wonder how soon the scenario of the (formerly) starving artist will progress in the realm of higher education.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *