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“Economic policy needs to be analyzed in terms of the incentives they create, rather than the hope that inspires them.”
Price Controls
What Are Price Controls?
What Are Price Controls?
Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand
What Are Price Controls?
Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand
Can be a ceiling (limits how high) such as rent control
What Are Price Controls?
Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand
Can be a ceiling (limits how high) such as rent control
Can be a floor (limits how low) such as commodity guarantees and minimum wage laws
Why do prices rise or fall?
Why do prices rise or fall? Prices rise when the amount demanded
exceeds the amount supplied at existing prices: also known as a “shortage”
Why do prices rise or fall? Prices rise when the amount demanded
exceeds the amount supplied at existing prices: also known as a “shortage”
Prices fall when the amount supplied exceeds the amount demanded at existing prices: aka a “surplus”
Can there be a shortage and no less of the product?
Can there be a shortage and no less of the product? Housing after WWII: lots of it, but
landlords not willing to rent at artificially low rents, people used more housing than they needed, no new housing was built
In San Francisco, an estimated 10,000 units are currently kept off market by landlords because of rent control
Other rent control fails
Other rent control fails
New York, San Francisco, Sweden, Toronto, Santa Monica
Other rent control fails
New York, San Francisco, Sweden, Toronto, Santa Monica
SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old!
Other rent control fails
New York, San Francisco, Sweden, Toronto, Santa Monica
SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old!
25% of people with rent-controlled apartments in SF make more than $100,000/year
Other rent control fails
NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people
Other rent control fails
NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people
Melbourne: No new buildings erected
Other rent control fails
NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people
Melbourne: No new buildings erected Toronto: 23% of units pulled off market
within three years of imposition of rent control
Lessons of Rent Controls
Lessons of Rent Controls
Policies intended to make affordable housing have opposite effect
Lessons of Rent Controls
Policies intended to make affordable housing have opposite effect
In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price
Lessons of Rent Controls
Policies intended to make affordable housing have opposite effect
In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price
Scarce resources go to commercial & luxury
Lessons of Rent Controls
Policies intended to make affordable housing have opposite effect
In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price
Scarce resources go to commercial & luxury
The affluent get more benefit from rent control than do the poor
Price Control Failures:
Gas Price Controls
Remember:
Intent vs Consequences
Gas price controls
The scene: 1973-74: Federal government keeps oil prices artificially low
Gas price controls
The scene: 1973-74: Federal government keeps oil prices artificially low
Intent: prevent “price gouging” when Middle East suppliers decreased supply
Gas Price Controls
Gas Price Controls
With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand
Gas Price Controls
With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand
With gas, as other scarce resources put under price controls, shortages and scarcity are two different things
Gas Price Controls
With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand
With gas, as other scarce resources put under price controls, shortages and scarcity are two different thing
Shortages are often price related
Price Control Blowback: Quality
Price Control Blowback: Quality Quality suffers with price controls
Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created
by price controls, means sellers no longer have to please buyers
Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created
by price controls, means sellers no longer have to please buyers
Stations kept open fewer hours to sell same amount of gas
Price Control Blowback: Quality Quality suffers with price controls Shortages, caused by incentives created
by price controls, means sellers no longer have to please buyers
Stations kept open fewer hours to sell same amount of gas
In housing, landlords let property deteriorate
Price Control Blowback: Medical
Price Control Blowback: Medical At artificially low prices, people with
minor ailments make frequent visits to doctor
Price Control Blowback: Medical At artificially low prices, people with
minor ailments make frequent visits to doctor
Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery
Price Control Blowback: Medical At artificially low prices, people with
minor ailments make frequent visits to doctor
Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery
Docs spend less time per patient when prices are controlled
Price Control Blowback: Black Markets
Price Control Blowback: Black Markets Price controls almost inevitably produce
‘black’ markets: transactions outside of system
Price Control Blowback: Black Markets Price controls almost inevitably produce
‘black’ markets: transactions outside of system
Bribes common to get food, gas, medical care, housing
Price Control Blowback: Black Markets Price controls almost inevitably produce
‘black’ markets: transactions outside of system
Bribes common to get food, gas, medical care, housing
In price control environments, goods/services get diverted to black market
Price control blowbackHoarding People will keep a larger inventory of
price-controlled goods than they ordinarily would… be it gas or apartments
Price ‘Floors’
Price ‘Floors’
Prices set above the free-market will cause more to be supplied than demanded
Price ‘Floors’
Prices set above the free-market will cause more to be supplied than demanded
During Depression, farmers going out of business led to price ‘floors’
Price ‘Floors’
Prices set above the free-market will cause more to be supplied than demanded
During Depression, farmers going out of business led to price ‘floors’
Government buys up surplus to keep prices high
Price ‘Floors’
Prices set above the free-market will cause more to be supplied than demanded
During Depression, farmers going out of business led to price ‘floors’
Government buys up surplus to keep prices high
Huge surpluses were produced
Price ‘Floors’
• Prices set above the free-market will cause more to be supplied than demanded
• During Depression, farmers going out of business led to price ‘floors’
• Government buys up surplus to keep prices high
• Huge surpluses were produced• Surpluses, like shortages, are price
phenomenon
Blowback: Price ‘Floors’
Blowback: Price ‘Floors’
Americans spend $2 billion in artificially higher prices just for sugar
Blowback: Price ‘Floors’
Americans spend $2 billion in artificially higher prices just for sugar
Every cow in Europe gets more subsidies per day than most Africans live on
Blowback: Price ‘Floors’
Americans spend $2 billion in artificially higher prices just for sugar
Every cow in Europe gets more subsidies per day than most Africans live on
Most subsidies go wealthy, corporate farmers
Blowback: Price ‘Floors’
Americans spend $2 billion in artificially higher prices just for sugar
Every cow in Europe gets more subsidies per day than most Africans live on
Most subsidies go wealthy, corporate farmers
About 20% of U.S. farm income is government subsidies
Blowback: Price ‘Floors’ Americans spend $2 billion in artificially
higher prices just for sugar Every cow in Europe gets more subsidies
per day than most Africans live on Most subsidies go wealthy, corporate
farmers About 20% of U.S. farm income is
government subsidies 40% or more in E.U. and Japan
If price controls are so bad, why do we have them?????
Politics
People demand political ‘solutions’ to problems
Politics
People demand political ‘solutions’ to problems
Politicians happy to oblige
Politics
People demand political ‘solutions’ to problems
Politicians happy to oblige The ‘solutions’ – i.e., price controls,
socialized medicine, ‘free’ college education, ‘affordable housing,’ etc. – usually exacerbate the problem
Politics
• People demand political ‘solutions’ to problems
• Politicians happy to oblige• The ‘solutions’ – i.e., price controls,
socialized medicine, ‘free’ college education, ‘affordable housing,’ etc. – usually exacerbate the problem
• Problem is lack of understanding of basic economics, not just by politicians but by electorate
Assignment 2/5
Read “I Pencil” by Leonard Read. Link will be on website
Read Chapter 5 in Basic Economics: “The Rise and Fall of Businesses”
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