The economists’ view on price controls: the good news and the bad news
Chicago Booth’s Initiative on Global Markets (IGM) occasionally publishes responses from well-known economists from prestigious schools on various public policy issues.
On June 7, IGM released responses on the subject of price gouging. He asked 2 questions. I will discuss the first and the responses to the first.
Question A: It would be helpful to the US economy to prohibit companies with revenues over $1 billion from offering goods or services for sale at an “unreasonably excessive price” during a shock. outstanding in the market.
What would my A and A- students have said at the end of a lesson while the materials were fresh? I think they would have said “No” or “Hell, no”.
The options given were “Strongly Agree” (Hell, yes), “Agree” (Yes), “Unsure”, “Disagree” (No), “Strongly Disagree (Hell, no), “No Opinion or “Didn’t Answer.”
First the good news.
44% of respondents disagreed and 21% strongly disagreed. No one strongly agreed and only 5% agreed.
Expect; there is more good news. Weighted by the confidence of each respondent, the results are even more biased. Only 3% agreed, 52% disagreed, and 32% strongly disagreed.
Now the bad news preceded by a little good news from Eric Maskin and Austan Goolsbee.
Respondents were also allowed to give reasons. What would be a good reason? How about this: price controls cause shortages and it is precisely when there are “exceptional market shocks” that it is even more crucial to avoid price controls. Think of price controls on ice during a power outage or on plywood during a hurricane.
Many of them didn’t bother to give reasons. It’s understandable. These people are busy and they might well think that the reasons that seem obvious to me are actually obvious.
Harvard’s Eric Maskin said it well:
In times of scarcity, high prices can serve to stimulate an increase in supply.
In fact, it’s the quantity supplied (think movement along a supply curve), but again, I’m sure he was in a hurry.
Austan Goolsbee from the University of Chicago has a good answer that expresses his frustration with the question posed:
How did we come back to this?
This is consistent with his previous comment on a similar issue.
Stanford’s Caroline Hoxby starts strong but then ends with a surprising concession:
Prices rebalance markets by generating supply and demand responses. Price suppression is counterproductive, except during short-term events like hurricanes.
Nope! Hurricanes are not an exception. It is even more important to get supply and demand responses during a hurricane. If the hurricane is in Florida, it’s good to have trucks lining up in Georgia and South Carolina to ship plywood at high prices. And it’s good to make the wealthy mansion owner wonder if he can make do with plywood to fill his bay windows but no plywood to secure his tool shed. If he foregoes the latter, that frees up plywood for the guy with the double-wide trailer.
Some economists responded as lawyers instead of economists. Harvard’s Oliver Hart, for example, wrote:
The terms “unknowingly excessive price” and “exceptional market shock” are not well defined and therefore their application would be a nightmare.
Quite true, but even if the application was not a nightmare, the shortages caused would be.
Similarly, Ken Judd of Stanford replied:
What is the definition of “inadmissible”? Laws must be much clearer and more precise than vague sentences that express moral sentiments.
Good point, but what if the laws were totally clear: for example, you can’t increase prices by more than 50% of what they have done on average in the last 3 months? Would Ken be satisfied with this kind of law?
Carl Shapiro of UC Berkeley writes:
The first step is to define an “unreasonably excessive price”. Once this is done, economists will be able to assess the effects of this bill.
Sure. But why should its evaluation depend on the definition? If price controls are binding, there will be shortages.
So good for them for their brief answers but not so good for most explanations.