Saturday, September 26, 2009

Meddling With Prices: Caps

The government may set a price that is artificially low, that is, below what demand would currently cause. Richard Nixon did this, with gasoline, in response to the 1973 oil embargo. Because prices were low, there was no reason to make up for the drop in supply. Also, there was very little reason for people to try to conserve gasoline. The result was that demand greatly outstripped supply, leading to shortages. Then rationing was added, which imposed extra costs on buyer, seller, and the government. Gas lines were a fact of life throughout the 70s as a result of all this meddling. The winners were public officials who claimed "I DID something about the high price of gasoline," people who sold their extra gas rationing coupons, and gas station attendants who took bribes to let people buy when the rationing schemes were against them. The losers were everyone who waited in line for gasoline, and everyone who didn't make and sell more gasoline because the price wasn't high enough.

Rent controls do the same sort of thing. Supply is reduced, while demand is increased. The winners are politicians and people who live in rent-controlled housing. There is a long list of losers. First are the rent-controlled landlords, who cannot raise prices to deal with increases in their costs. Second are their tenants. Because their landlords are making little or no money, they often have to forgo ordinary maintenance and sometimes even vital repairs. Third are developers, who don't bother to develop new housing because the rents will be held below what they'd need to make their money back and a living. Fourth is the city, which doesn't get the property taxes from the properties the developers don't make. But the ones who suffer most are the people who cannot get a home. Some go homeless. Most go to live somewhere else. You get long lists of people waiting for homes instead of long lines waiting for gas, but the basic problems -- shortage and waiting -- are the same. And you get the other typical problem, which is essentially a black market. In the case of housing, this is a giant up-front fee charged by the landlord in order to finalize a lease.

In this series:
Supply, Demand, and Price | Price Caps | Price Supports | Restricting Supply | Excises | Subsidies

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