Why wouldn’t price caps work in stopping inflation?


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.


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.