Price Controls… a fallacy

First Published: 2005-03-02

As pointed out by the Institute a few months ago, price controls are used in the Bahamian context to supposedly control the profit business people are allowed to make, as if there is something inherently wrong with profit. Business people are portrayed as if they are stealing from their customers… their patrons who willingly choose to pay for… or not pay for an item.

The tragedy with this legislation is that it reduces the incentive to purchase, inventory and sell the "controlled" items, thereby stifling the competition that would bring prices down. By doing this, politicians actually think they are dividing the economic pie. A pie that is not static. If the pie is not allowed grow through the inventiveness and creativity of entrepreneurs, the same people that "price controls" are supposed to protect, are hurt. The standard of living of all Bahamians has increased dramatically over the past eight years as a result of economic growth. Price control policies slow the growth necessary to keep expanding the economic pie for everyone to improve their lot in life.

To quote Rev. Robert Sirico of the Acton Institute (www.acton.org): one "cannot disdain those who work and those who are successful in their labour simply because they make a profit." So why not encourage competition, rather than stagnation?

Business people must be fair!

Price controls occur because governments contend (as good socialists) that business people have the power to raise prices artificially and earn a return that is "unfair" while the customer does not have a comparable "power" to force prices down. As evidence of this critics point to the much bigger spreads earned here than in the major markets of the United States. Generally, the arguments for price controls are static… let’s divide the pie in a "fairer" way… and overlook the issue of prices being an incentive that causes dynamic change.

A recent "informal" market survey shows that the larger food store chains offer all price controlled items, except dairy products, at prices considerably lower than the maximum retail prices permitted. In smaller "Mom and Pop" or neighbourhood stores the results are the opposite.

This result is obviously not what the social planner’s intended when they implemented price controls. However, it is a true reflection of the market at work. "Mom and Pop" stores serve a different market than the food store chains so they can demand higher prices, despite the legislation. These neighbourhood stores are physically closer to their clientele, purchase and sell in smaller quantities… often on credit, which require higher margins because of the economies of scale.

Of course government promotes price controls as protection for the consumer and misunderstand how the market works.

History provides useful lessons

In October 1774 the Continental Congress in the US declared that "all manufactures of this country be sold at reasonable prices," and that "vendors of goods or merchandise will not take advantage of the scarcity of goods… but will sell the same at rates we have been respectively accustomed to do for 12 months last past."
(Forty Centuries of Wage & Price Controls – Robert Schuettinger and Eamonn Butler)

After just over three years (February 1778) the authors inform that the Connecticut legislature adopted even more wage and price controls. Interestingly enough by June of 1778 the Governor wrote the congress to advise that the changes had also been "ineffectual."

As further evidence that price controls do not work, "the General Court of Massachusetts, convinced that the price-fixing measures "have been very far from answering the salutary purposes for which they were intended," completely repealed both laws," in 1777.

Implement sound economic policy to benefit the consumer

Economics has been deemed the dismal science, when in fact it is more to do with human action. If one party charges excessive prices, another enterprising individual will go into business to sell to those people who feel they are being taken advantage of. This should be allowed to take place in a free market, not where liberty is subverted to the will of legislation that is inherently immoral.

The government policies implemented are simply to reduce or control competition and it accomplishes this through a number of devices such as licensing and price control. With policies like this the politicians appear to want the best of all governmental world’s… create or protect "Bahamian" monopolies or at least appear to be doing so and at the same time regulate retail margins and prices to protect the customer. Income distribution and "politics" are just wonderful!

Government should send price controls to the scrap heap of history like other countries have done! This will ensure better prices and more competition… sound policy that really benefits the consumer.

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