Price ceilings cause shortages

What would happen to the supply of gold if tomorrow morning the federal government declared it illegal to sell it for more than $500 an ounce? Every last bit would be snapped up by the close of business that day, and gold producers would shut down. Instant shortage. You can apply the same relentless cause-and-effect to other forms of price ceilings (that is, maximum prices set by law).

Rent control laws cause a drastic boost in demand for apartments and a drastic drop in the supply of landlords willing to rent apartments at painfully low rates … which combine to cause shortages. Ask anybody in New York City how easy it is to find an apartment that you can afford that’s also suitable for human habitation.

Remember the gasoline lines of the 1970s? Price ceilings enacted by the Nixon administration were to blame. Demand spiked while supply cratered.

In 2007 the government of Zimbabwe imposed price ceilings on the prices of food, resulting in shortages and utter chaos.
Remember all of those rolling power blackouts in California in 2000? You guessed it. Price ceilings again, this time on retail electricity rates. The wholesale price of electricity was allowed to float freely, but the power companies weren’t allowed to charge enough to recoup their expenses. They had to reduce the supply of power to avoid going bankrupt. After all, you can’t stay in business by buying widgets for $10 and selling them for $5, could you?

The British health care system sets price ceilings on health care. The result? Artificially high demand, shortages, rationing, crappy care, black markets, and corruption.

Watch and learn.

Given this completely predictable pattern, how likely is it that President Obama’s plan to impose price ceilings on health insurance premiums will “promote competition, transparency and better deals for consumers” as he predicts?

2 comments

  1. Brain Shavings

    Supply and demand, surplus and shortage

    It just occurred to me that some of my readers may be unfamiliar with the concepts in my post on price ceilings. Supply and demand are basic concepts in economics, and although we all intuitively…