Price Controls: Still a Bad Idea
Published July 20, 2022
The disruptive effects of inflation on people’s lives are not to be taken lightly, but responding with price controls fails to provide a long-term solution. The underlying principles driving the change in prices cannot be fixed by blaming corporations for higher costs. Previous efforts to use price controls resulted in shortages far more painful than the inflation they were meant to cure.
- If price controls have failed before, why are they being proposed now?
- Which is worse, high prices or shortages of goods?
In 2021, Americans experienced inflation rates not seen since the early 1980s.
In response, some called for price controls on key goods to protect everyday Americans.
But using price controls to reduce inflation is like responding to cold weather by breaking the thermometer. Just as thermometers respond to temperature, prices are an indicator of underlying supply and demand.
During the COVID-19 pandemic, for example, prices of used cars skyrocketed. But that wasn’t due to greedy car owners. A computer chip shortage limited the supply of new cars, so more drivers chose to keep their used cars instead. Reduced supply meant higher prices.
Implementing price controls might appear to reduce prices, but fewer people would sell their cars, and cars for sale would sell instantly. The result would be that many more people wouldn’t be able to buy a car at all.
Just as breaking a thermometer doesn’t cause the temperature to rise, controlling prices doesn’t cause inflation to fall.
Instead, as history and basic economics show, price controls produce shortages that are far more painful than the original price increases.