Previously I did a thread on rationing policies, which may become necessary if quarantines of workers produce shortages of goods: . But rationing is very difficult to implement without price controls. So here's a thread about that. 1/
What are price controls?
Without getting too bogged down, price controls are when the government mandates how sellers of goods must determine prices. This can work in a number of different ways. 2/
Without getting too bogged down, price controls are when the government mandates how sellers of goods must determine prices. This can work in a number of different ways. 2/
Why would we want price controls rather than letting sellers set prices as normal? One reason might be to stop certain kinds of inflation. Another reason is to aid in rationing, because rationing policies are basically not workable without price controls. Why is that? 3/
Suppose the authorities issue too little ration credit for some good relative to how much gets produced. That means there will be goods sitting on the shelves that nobody will be allowed to buy. In competitive markets, this excess supply will push prices towards zero. 4/
Now suppose the authorities issue too much ration credit relative to production for the good. Then as the store is hitting the last few units, there will be too many customers who are expecting to get them, and they are liable to start competing against each other, driving up 5/
the price.
Because both production and demand will vary every month, it will be impossible for ration authorities to issue exactly the right amount of rations. Price controls are therefore needed to create stability in these markets. 6/
Because both production and demand will vary every month, it will be impossible for ration authorities to issue exactly the right amount of rations. Price controls are therefore needed to create stability in these markets. 6/
How are price controls done?
The simplest way is called a "general freeze." The gov simply declares that whatever prices were on a certain day (eg. yesterday), that's what they'll be until further notice. This can apply to all prices in the economy, or only to certain goods. 7/
The simplest way is called a "general freeze." The gov simply declares that whatever prices were on a certain day (eg. yesterday), that's what they'll be until further notice. This can apply to all prices in the economy, or only to certain goods. 7/
If you do this, then you need to have a mechanism for sellers to petition to be allowed to raise prices. If not, then costs might rise with firms not allowed to raise prices, until they're producing at a loss and go bankrupt (This is one theory of what caused hyperinflation in 8/
Venezuela: price controls below cost caused huge swathes of the private sector to go bust, dramatically reducing production of goods.)
A price freeze across the entire economy is the least administratively burdensome way to do price controls, but also not very flexible. 9/
A price freeze across the entire economy is the least administratively burdensome way to do price controls, but also not very flexible. 9/
Another way is through "dollars-and-cents" orders. This is when the gov makes lists of prices for individual goods, eg. "apples now cost $1, milk costs..." etc. This is quite difficult administratively because it takes a lot of information. But it can also be done on a local 10/
level, and so can be more responsive to local needs.
And a third way is through "formula prices," when the gov gives sellers a formula to use when calculating their prices, typically factoring in costs, wages, etc. 11/
And a third way is through "formula prices," when the gov gives sellers a formula to use when calculating their prices, typically factoring in costs, wages, etc. 11/
There are all kinds of problems with price controls. For instance, they create difficulties when goods are produced by multiple firms who have very different cost structures: should we go with the low price, that bankrupts the high-cost producers? or the high price, that 12/
creates large profits for the low-cost producers?
Also, they typically require wage controls as well: if businesses are limited in what they can charge but aren't limited in what they might have to pay, then that's asking for big problems. 13/
Also, they typically require wage controls as well: if businesses are limited in what they can charge but aren't limited in what they might have to pay, then that's asking for big problems. 13/
Importantly, once the gov is setting prices then it's also determining income distributions - eg. if gov lets wages rise faster than prices, then workers increase their share of GDP. If food prices rise faster than land rents, then farmers gain over landlords. Etc. 14/
Finally, price controls depend on enforcement and cracking down on black markets. But, if consumers feel like they are benefiting from price controls, then they will 'deputize' themselves, and report/shame sellers who flaunt the controls. 15/
As with rationing and other "command economy" policies, we should hope that we don't actually end up needing price controls. But if quarantines create prolonged shortages, then we'll need rationing and price controls. These policies are how we keep order when times are tough /Fin
