Wednesday, July 22, 2009

Government health care: The effects of price controls

From Practical Economics

Price controls give government a more dominant role in the operation of the economy. The premise behind price controls is to either place a cap, or top price, a producer can charge for their product thus protecting the consumer, or place a minimum price consumers have to pay for a product thus helping the producer. In each and every case, price controls seem to offer valid solutions to market realities that seem troubling. Unfortunately, the good intentions of price controls create the opposite of the desired results.

Price controls are simply a game of economic slight-of-hand where costs are shifted to unsuspecting victims. Thomas Sowell said:
Misconceptions about the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws and policies to get those prices paid by somebody else. For society as a whole, there is no somebody else. Yet few of those in politics seem prepared to face the fact. Economists may say that there is no such thing as a free lunch but politicians get elected by promising free lunches.

The following is a list of problems that arise by placing price controls in the market. As you will see, all of the ramifications of price controls create inefficiencies, lower the standard of living and inhibit economic growth.

-Create shortages and surpluses of goods
-Lower the quality of products

-Remove the incentives to be productive
-Worsen the problems that gave rise to the price control policy in the first place
-Expanded bureaucracy
-Lose individual economic freedom
-Increase economic engineering by government decree
-Decrease voluntary exchange
-Decrease efficiency

-Slows economic growth
-Fail to economize scarce resources
-Create powerful incentives that persuade normally law abiding people to break the law by forming black markets
-The ineffectiveness of the control will result
in calls for even tougher controls


  1. A great teacher once told me. "The best policy for fair trade is to embrace trade free from sanctions or artificially imposed price controls within the rule of law."

  2. The same is true of rent control laws particularly. By introducing a cap on what landlords can rent at, they remove the incentive to build, update, modernize, or even keepup the original buildings. More than that, if the control is especially unfair, landlords will find they do not even have the capital to reinvest, even if they so choose.

    And so buildings become overrun with delinquents; whole neighborhoods are reduced to slums, and the ultimately the people are hurt. This, in turn, causes even tougher restrictions to be place on the backs of capital producing landlords all in the name of protecting the people. Tragedy begets tragedy.