Thursday, October 1, 2009

Meddling with Prices: Restricting Supply

The government may restrict supply, but leave the price free. This drives prices up. Approved providers win. Everyone else loses. This also reduces innovation. There are many, many markets where supply is artificially restricted. Franklin Delano Roosevelt did his best to restrict the supply of food during the height of the Depression, even when many people were struggling to feed themselves. He also used price supports. Real estate markets are restricted by zoning. And a vast array of professions are limited in supply by licensing. And the tighter licensing always results in more people, not less, either doing without or trying to do difficult or dangerous things themselves. For example, the more difficult it is to become an electrician, the fewer people become one. The fewer electricians there are, the more they charge. The more it costs to hire an electrician, the more people are too poor to afford one. The more people who can't afford an electrician, the more try to do electrical work themselves. The more unqualified people do their own electrical work, the more electrocutions there are.

Another example of restricting supply is the Cash for Clunkers program. Cars that get traded in are destroyed (see video), no matter how pristine and useful they may be. This reduces the supply of cars, driving prices higher.

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

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