I keep seeing comments about how companies are having record profits, and consumers are paying for inflationary prices. Can governments regualte profit margins as a form of consumer protection?
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Usually governments don’t regulate profit margins directly but introduce policies to promote fair competition, which prevent businesses from earning abnormally high margins.
However, in some cases governments directly dictate what sort of profit margins a business can earn. For instance, in some countries governments regulate the price of utilities such as water or central heating. The price of such services is typically calculated as the costs to provide the service plus a certain allowed level of profit margin, e.g. 5%.
Governments do that to ensure that a company which is the only provider of a service doesn’t charge an unjustified price. However, setting a fixed margin creates an incentive for companies to inflate costs instead of cutting them, so it’s not a magic tool to make a monopoly into a fair business.
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