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?
In: 182
It’s been tried. Where do you apply these price caps?
Say you’re a grocery store that sells bread. The government comes in and says you can’t sell bread for more than $3.00. But your bread supplier says due to inflation, they can only sell bread for $3.25. Suddenly it becomes impossible for the grocery store to sell bread reasonably.
So you go down to the bread supplier and say they can’t sell bread for more than $3.00. But the cost of their ingredients and labor exceed $3.00. So they can’t make that work.
What the hell do you do.
The thing with inflation is that everyone is going to be having ‘record’ everything. This may not be Eli5, but it doesn’t need a lot of math. Most profit margins… operate on a % basis. Heck, even sales tax is normally on a %basis.
So Say a grocery store sell something for $10 and they have a 10% profit margin. So they store makes $1.00.
Let’s say inflation drives up the cost of that to $20. They still want a 10% profit margin. So the stores makes $2.00.
The government’s revenue also goes up accordingly. Imagine sales tax is 10%. The government also makes $1 and $2.
The headlines you will see is Grocery store profit increases 100%.
Now could grocery stores and government reduce their %profit/tax? Possibly. But in an inflation environment everything starts to cost more. Labor, source materials… and so it goes.
Unless there is a clear case of exploitation, price caps aren’t a good idea.
Latest Answers