Lesson 49: Price Controls

One of the favorite activities of politicians is catering to various special interest groups. These special interest groups get richer and share some of their plunder with the politicians.

Price controls are very populat with special interest groups. Everything from the Fed controlling the price of money (interest rate) which helps rich people get richer to the Department of Agriculture controlling the price of grain (parity prices) which helps big corporate farmers get richer.. There are no lobbying groups for consumers or small producers.

Every transaction between owners is like an auction. Buyers compete against buyers and sellers compete against sellers. The result is the determination of market prices.

But not everybody likes market prices. Sellers want prices to be higher and buyers want prices to be lower. In a free market that is just a desire not a reality.

Enter the politicians and special interest groups. To help certain sellers they set legal prices higher than market prices (price floors). This interferes with the incentive function of prices. These unnatural prices have unintended consequences specifically surpluses that have to be dealt with, usually by having government buy the surplus with taxpayer money.

To help certain buyers the politicians set legal prices lower than market prices (price ceilings). This destroys the rationing function of prices. In the 1970’s maximum legal prices were set on gasoline. The result was various rationing schemes to determine which drivers would get gas and which ones would not.

Have you ever been to an auction? The universal rule is “high bid wins”. Now imagine an auction where maximum or minimum prices are set by the government. No one would go to an auction like that.

In the natural society there would be no price controls. There would be no surpluses the government to buy or shortages which require government rationing such as coupons. The auction rule would prevail on everything.

High bid wins. This is not only fair but it is also efficient. No one complains at an auction just because the high bid won. Since every voluntary transaction in the marketplace is mutually beneficial society (the total of all individuals) benefits when market transactions are maximized