“Economic policy needs to be analyzed in terms of the incentives they create, rather than the hope that inspires them.”

Price Controls

What Are Price Controls?

 Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand

What Are Price Controls?  Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand  Can be a ceiling (limits how high) such as rent control

What Are Price Controls?  Imposed to keep prices from rising or falling to the levels they would reach in response to supply and demand  Can be a ceiling (limits how high) such as rent control  Can be a floor (limits how low) such as commodity guarantees and minimum wage laws

Why do prices rise or fall?

 Prices rise when the amount demanded exceeds the amount supplied at existing prices: also known as a “shortage”

Why do prices rise or fall?  Prices rise when the amount demanded exceeds the amount supplied at existing prices: also known as a “shortage”  Prices fall when the amount supplied exceeds the amount demanded at existing prices: aka a “surplus”

Can there be a shortage and no less of the product?

 Housing after WWII: lots of it, but landlords not willing to rent at artificially low rents, people used more housing than they needed, no new housing was built  In San Francisco, an estimated 10,000 units are currently kept off market by landlords because of rent control

Other rent control fails

 New York, San Francisco, Sweden, Toronto, Santa Monica

Other rent control fails  New York, San Francisco, Sweden, Toronto, Santa Monica  SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old!

Other rent control fails  New York, San Francisco, Sweden, Toronto, Santa Monica  SF: 49% of rent-controlled apts occupied by one person; 75% of rental units 50 years old!  25% of people with rent-controlled apartments in SF make more than $100,000/year

Other rent control fails  NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people

Other rent control fails  NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people  Melbourne: No new buildings erected

Other rent control fails  NYC: Turnover half of national average; 4x as many abandoned units as there are homeless people  Melbourne: No new buildings erected  Toronto: 23% of units pulled off market within three years of imposition of rent control

Lessons of Rent Controls

 Policies intended to make affordable housing have opposite effect

Lessons of Rent Controls  Policies intended to make affordable housing have opposite effect  In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price

Lessons of Rent Controls  Policies intended to make affordable housing have opposite effect  In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price  Scarce resources go to commercial & luxury

Lessons of Rent Controls  Policies intended to make affordable housing have opposite effect  In housing, like all scarce resources that have alternative uses, less is supplied at a lower price than at a higher price  Scarce resources go to commercial & luxury  The affluent get more benefit from rent control than do the poor

Price Control Failures: Gas Price Controls Remember: Intent vs Consequences

Gas price controls  The scene: : Federal government keeps oil prices artificially low

Gas price controls  The scene: : Federal government keeps oil prices artificially low  Intent: prevent “price gouging” when Middle East suppliers decreased supply

Gas Price Controls

 With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand

Gas Price Controls  With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand  With gas, as other scarce resources put under price controls, shortages and scarcity are two different things

Gas Price Controls  With prices frozen, there was little incentive to move gas from one area to another, as would normally happen in free markets with prices responding to supply and demand  With gas, as other scarce resources put under price controls, shortages and scarcity are two different thing  Shortages are often price related

Price Control Blowback: Quality

 Quality suffers with price controls

Price Control Blowback: Quality  Quality suffers with price controls  Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers

Price Control Blowback: Quality  Quality suffers with price controls  Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers  Stations kept open fewer hours to sell same amount of gas

Price Control Blowback: Quality  Quality suffers with price controls  Shortages, caused by incentives created by price controls, means sellers no longer have to please buyers  Stations kept open fewer hours to sell same amount of gas  In housing, landlords let property deteriorate

Price Control Blowback: Medical

 At artificially low prices, people with minor ailments make frequent visits to doctor

Price Control Blowback: Medical  At artificially low prices, people with minor ailments make frequent visits to doctor  Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery

Price Control Blowback: Medical  At artificially low prices, people with minor ailments make frequent visits to doctor  Among five English-speaking countries, only U.S. has a single digit waiting list for elective surgery  Docs spend less time per patient when prices are controlled

Price Control Blowback: Black Markets

 Price controls almost inevitably produce ‘black’ markets: transactions outside of system

Price Control Blowback: Black Markets  Price controls almost inevitably produce ‘black’ markets: transactions outside of system  Bribes common to get food, gas, medical care, housing

Price Control Blowback: Black Markets  Price controls almost inevitably produce ‘black’ markets: transactions outside of system  Bribes common to get food, gas, medical care, housing  In price control environments, goods/services get diverted to black market

Price control blowback Hoarding  People will keep a larger inventory of price-controlled goods than they ordinarily would… be it gas or apartments

Price ‘Floors’

 Prices set above the free-market will cause more to be supplied than demanded

Price ‘Floors’  Prices set above the free-market will cause more to be supplied than demanded  During Depression, farmers going out of business led to price ‘floors’

Price ‘Floors’  Prices set above the free-market will cause more to be supplied than demanded  During Depression, farmers going out of business led to price ‘floors’  Government buys up surplus to keep prices high

Price ‘Floors’  Prices set above the free-market will cause more to be supplied than demanded  During Depression, farmers going out of business led to price ‘floors’  Government buys up surplus to keep prices high  Huge surpluses were produced

Price ‘Floors’ Prices set above the free-market will cause more to be supplied than demanded During Depression, farmers going out of business led to price ‘floors’ Government buys up surplus to keep prices high Huge surpluses were produced Surpluses, like shortages, are price phenomenon

Blowback: Price ‘Floors’

 Americans spend $2 billion in artificially higher prices just for sugar

Blowback: Price ‘Floors’  Americans spend $2 billion in artificially higher prices just for sugar  Every cow in Europe gets more subsidies per day than most Africans live on

Blowback: Price ‘Floors’  Americans spend $2 billion in artificially higher prices just for sugar  Every cow in Europe gets more subsidies per day than most Africans live on  Most subsidies go wealthy, corporate farmers

Blowback: Price ‘Floors’  Americans spend $2 billion in artificially higher prices just for sugar  Every cow in Europe gets more subsidies per day than most Africans live on  Most subsidies go wealthy, corporate farmers  About 20% of U.S. farm income is government subsidies

Blowback: Price ‘Floors’  Americans spend $2 billion in artificially higher prices just for sugar  Every cow in Europe gets more subsidies per day than most Africans live on  Most subsidies go wealthy, corporate farmers  About 20% of U.S. farm income is government subsidies  40% or more in E.U. and Japan

If price controls are so bad, why do we have them?????

Politics  People demand political ‘solutions’ to problems

Politics  People demand political ‘solutions’ to problems  Politicians happy to oblige

Politics  People demand political ‘solutions’ to problems  Politicians happy to oblige  The ‘solutions’ – i.e., price controls, socialized medicine, ‘free’ college education, ‘affordable housing,’ etc. – usually exacerbate the problem

Politics People demand political ‘solutions’ to problems Politicians happy to oblige The ‘solutions’ – i.e., price controls, socialized medicine, ‘free’ college education, ‘affordable housing,’ etc. – usually exacerbate the problem Problem is lack of understanding of basic economics, not just by politicians but by electorate

Assignment 2/5  Read “I Pencil” by Leonard Read. Link will be on website  Read Chapter 5 in Basic Economics: “The Rise and Fall of Businesses”