So I try to stay on top on economic news, and one thing that is confusing me is why government enforced price caps on products wouldn’t work? All I hear is about how strong the economy still is, record profits for corporations, and increasing wealth of the country’s most affluent people. Wouldn’t price caps cause: 1) more wealth for the average consumer 2) still profitable corporations (albeit not the record profits that they continue to reach) 3) more equitable wealth distribution?
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Placing price caps to aggressively would potentially lead to a situation where businesses would rather not sell/produce that good altogether instead of being forced to sell for a loss.
Price caps cause shortages. Price is the natural equilibrium point where the demand for a good or service is equal to the supply of said good or service. Artificially lowering the price means that demand now exceeds supply, which means that not everyone who wants to purchase a good or service will be able to. The average person may have more wealth in the abstract, but that is somewhat meaningless if they are unable to use that wealth to buy anything.
If there is a limit on how much profit a company can earn the company has no incentive to produce more goods. That’s why you see in places where they institute rent controls there actually ends up being a shortage of affordable housing.
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Not really. The logistical effort of putting a price cap on common goods is monumental; your average grocery store has something like 40k items. Keeping that updated and checking compliance is much easier said than done. And that’s just a standard grocery store.
An effective price cap would put some companies out of business; if you limit the price of pasta based on the mass-produced pasta, then the artisan hand-made pasta company will not be able to break even, much less make money. They would close up shop.
If you want to limit price-gouging behavior, then you would want to limit profit. Not price. Which is even more difficult to manage.
1) more wealth for the average consumer? Depends on the measure of “wealth”. If people all have $1m but no water and food, is that a wealthy society? You can’t buy something that someone isn’t willing to sell. Broadly speaking, that is what price caps do – reduce supply.
2) still profitable corporations (albeit not the record profits that they continue to reach) – Probably but we don’t want protected profits. So the risk is short term price stability but long term industrial ossification. Most economies want dynamicism and innovation. Price cap punishes risk takers.
3) more equitable wealth distribution? It is very unclear how this happens. Industries producing less generally means employing fewer people. And the bulk of income in most nations is earned by workers. So reducing aggregate income increases equitable distribution?
There’s been a lot of good posts about equilibrium price in here but I want to add something I know a little bit about.
So prices are up at the grocery store, right? So why not just mandate that the box of max and cheese that used to be $2.50 and is now $3.25 needs to stay at $2.50?
Well, there’s a lot of steps that happen before you spend $2.50 on a box of mac and cheese from Kroger. They buy it from a vendor and they ship it in a truck. The vendor is charging more and gas is more expensive. Okay, you say, price cap the vendor and gas. Okay well the vendor didn’t make that Mac and cheese appear out of thin air. They need flour and cheese and 800 types of preservatives and those are all getting more expensive. So price cap all of those. Oh and also, labor costs are up because we’re coming out of a period with a hot job market. I doubt you want to cap labor costs, do you?
So in short, you can’t just cap the end price, there’s dozens or hundreds of components and if you break the chain at any point you can really fuck the economy.
The real reason is that the country’s most affluent people also essentially control all government policy.
It has in the past. Nixon did it, and the inflation spiral halted. The problem is that big business doesn’t like it, and they own the government.
All the answers here already covers all the basis.
I would recommend to read the book “Forty Centuries of Wage and Price Controls: How Not to Fight Inflation”. Is a great book that list and explain how all the attempts to control inflation trough price controls have failed miserably trough time and in pretty much every culture that have existed on the planet
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