Price fixing by governmental agencies has always ended in disasters. The last American President who did this was President Nixon when he put a 90 day freeze on wages and prices trying to put an end to inflation.
It ended almost as quickly as it began by further increasing what he was trying to stop.
Price ceilings, or the government passing a law saying that you can only charge a maximum price of “X” for a particular good or service should be understood when heard by an entrepreneur. Please allow me to explain.
You are now in the business of producing and selling a gallon of homogenized milk. A reasonable price that provides adequate supply is $4 per gallon. At this price you pay your bills and take home a modest profit.
But the government comes along and says that you can only charge $3 for that same gallon. What are you going to do?
Shortages
You know that if you’re dumb enough to only charge $3 per gallon that you’ll lose money on every gallon you sell. Since none of us are in business to go broke, you stop selling homogenized milk and begin using your raw materials to make something like butter or cheese where you can actually make money.
When you hear the words Price Ceiling you should immediately think shortage. Entrepreneurs around the country would do exactly the same thing.
Black Market
When your neighbors Dick and Jane go to the supermarket and see no milk on the shelves they come to you to see if they can buy a couple of gallons. They’re tired of listening to their kids scream because they can’t eat Fruit Loops without milk.
But you don’t want to lose money. And since you would be breaking the law and would face substantial penalties for not selling that milk at $3 per gallon, you inflate the price to $8 per gallon. This compensates you for the increased risk of breaking the law.
When you hear the words Price Ceiling you should also think Black Market. In trying to stop inflation, shortages will occur, and what can be purchased will end up costing much more.
Let me leave you with this…
Before I start getting a bunch of hate emails from anyone supporting one political party or the other, please understand that I’m not talking politics.
This is nothing more than a simple example of Keynesian Economics. Its also a reminder that those who fail to study history are doomed to repeat it.
Price ceilings were a fixture of the economies of Cuba and the USSR. Even when the state owned all of the methods of production, shortages and a burgeoning Black Market were the only consistent results.
Let’ not act like there aren’t problems in the economic policies on both sides of the aisle. We can only hope that educated minds will prevail once anyone comes to power.
We’re all going to get through this. Let’s get through it together.
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