The case against price controls
Ryan Bourne recently edited a book that examines various types of price controls, and more broadly looks at the recent increase in hostility toward allowing markets to set prices. Here’s Bourne from pages 88-89 of The War on Prices:
[N]o planner can harness the knowledge necessary to effectively allocate goods and services to their highest-valued uses . . . Unlike a central planner, a market economy, through its price mechanism, can harness this knowledge . . . . As George Mason University economist Alex Tabarrok puts it, “Prices are a signal wrapped up in an incentive.”
This Matt Yglesias post caught my eye:
In previous posts, I’ve argued that the difference between left and right wing liberals is that the latter have a better understanding of the virtues of the price system. Left wing liberals (called progressives in America) tend to overestimate the extent to which government planners are able to improve on market outcomes. This is because economics is full of cognitive illusions—things are often not what they seem. I am surprised by how often I encounter even right wing people who are outraged by market outcomes such as price gouging, or insurance companies dropping coverage (because regulators won’t allow them to earn a profit.)
I often get angry with my home insurance company, so I can certainly sympathize. But in the back of my mind I always maintain awareness that the root cause of my anger is the refusal of California regulators to allow “capitalism between consenting adults”. I’d like to buy a smaller home insurance policy, but my insurance agent tells me that regulation prevents those sorts of policies from being offered. You are not allowed to insure you house at 50% of fair market value, but you are allowed to not buy any insurance at all. Very strange.
In the next few weeks, we can expect lots of articles about how landlords in LA are “price gouging”, due to the recent fire. I encourage people to read The War on Prices if they wish to learn about the consequences of government price controls.
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