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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Ps5 and switch during pandemic. They had a set retail price. What happened?
You see this happen in the US when price caps are instituted around hurricanes.
Stores can’t raise prices. A few people get to the store first and buy all of the batteries.
It’s not profitable to pay a company a special rate to load a truck in Maine full of batteries and drive them to Florida. So the store shelves are empty, which is perfectly legal for the store and does not open them up to lawsuits.
The store could raise the prices on the batteries, that way the first person to show up wouldn’t buy them all. People who *really needed* a pack of 4 D cell batteries could buy them for ~$50 or whatever. *And* there would be a truck on its way from Maine jam packed with more batteries that will arrive soon which the store could sell right after the storm for prices that reflect the cost and risk of buying that shipment. But that’s illegal. Because people think the stores are profiting instead of blaming their fellow shoppers. So the shelves are empty, which again is perfectly legal.
When a country institutes price caps for other reasons, like to “stop inflation” the same concept plays out. Why would a grocery store buy a shipment of rice for $100 that they can only sell for $30? So they don’t. So sometimes the government subsidizes the price and ships the store a little bit of rice for $29 that the store can sell for $30. So the first people to the store buy *all the rice* because they know if they don’t the next person will. And then the shelves are empty until the next pathetic shipment from the government arrives. The government can’t ship much rice because they are buying it for $100. This is a temporary measure to get to the next corrupt election or keep people just barely surviving enough so they don’t riot.
There’s a lot of Econ 101 explanations here that are wrong. The world is never as simple as one sentence explanations like “minimum wage increases unemployment” or “price caps produce shortages.”
Price caps can produce shortages but do not necessarily produce shortages.
Let’s say I cap the price of eggs at 50 dollars a dozen. There obviously won’t be a shortage because it’s well over the normal price.
Let’s say I cap the price at 50c per dozen. That obviously would.
Now let’s say I cap the price at 1.5x the price to produce and ship the eggs with all relavent factors accounted for. This would have drastically reduced the price of eggs this last year and not lead to a shortage.
The reason is simple. Eggs were price gouged using the bird flu as an excuse. Egg production was not significantly impacted by the flu and profit margins went up 700% because the public expected them to. The largest egg producer admitted they did not lose a single bird to the flu, for example.
In this case, it prevents price gouging while keeping profits well above what the cost is, thereby maintaining an incentive to produce more eggs to capture that healthy profit margin.
If the public over buys you can introduce rationing as well. It was done successfully in the past without computers and would be far easier to implement now.
We used to do this very successfully but neoconservative economics has been the model since the 70s so we don’t use effective techniques for improving the lives of the public anymore.
Generally speaking, any attempt to manipulate prices or the economy for most goods will result in a plethora of unintended consequences. Price caps result in shortages and decreased quality of goods. Rent control is a great example; in economics there is a saying that second to bombing, rent control is the best way to destroy a city. Instead of price caps, regulation allowing more production of the good in question (whether it be bread or apartments) will help bring prices down.
Price caps force suppliers and retailers to operate at a loss. You can cap the price on gas, but you can’t coerce the gas station to supply it, or an oil company to drill and refine it. Short term, you might get away with some price limits, so as to prevent gouging, but in the long term, you’re putting the businesses who supply the goods you’ve controlled **OUT OF BUSINESS**. Classically what happens is that the goods come off the legitimate market, and the same goods show up in the black market at their *actual* price.
>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.
And those are lies. The reason there are “record profits” is because those profits weren’t amortized over the two year lockdown when companies were losing tons of money. Big picture, what we’re seeing is the economy recovering from the pandemic. People are rehiring, the subset of businesses which survived are doing well, because they have less competition. But the overall health of the economy is still far worse than if the pandemic had never taken place.
>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?
No. When prices go up, they encourage more suppliers to enter the market, and enable existing suppliers to devote more land, labor, and capital to the delivery of that good or service. When you remove that, you exacerbate the problem you’re trying to fix, literally choking off the flow of the good your consumers want.
I’m so sick of hearing people whine about the rich increasing their wealth. You have the exact same access they have: the stock market. You can earn exactly the same returns they can.
Price controls have a multi-thousand year history of failure, including playing a part in the fall of the Roman Empire.
No one anywhere can ever have enough information to properly balance the myriad influences that lead to a perfect supply-and-demand situation. Free markets usually produce the best possible exchanges for the most people. Controlled markets fail quickly in both regards because they offer no flexibility.
Also aside from the well written and concise responses referencing markets and trade etc I want to say that british gas made 900% increased profits in the first half this year due to increased prices. This is not about being fair. We are raising our arses in the air to get fucked yet again without a single petrol bomb or riot in response. Disgusting business practices and too stupid of a population to form a response. Stick love island on and let’s all forget about it over beers👍
It results in shortages and also encourages suppliers of the good to move out of that business and into a new one.
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.
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