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Do price controls cause shortages? Yes

Peter Smith



The message below was shared in a WhatsApp group, Towards Media Excellence, that was created to promote media excellence, and the late Mugabe was never truly understood the toxicity of price controls in regards to the general availability of goods.

The Year was 1985 and what is described as Good News was actually the beginning of Bad News for many Zimbabweans.

Price Controls Cause Shortages

It is not in dispute that when prices of goods and services are subjected to price controls, the market always responds to administratively determined prices in a predictable manner.

If the government imposes a limit on how high a price can go, there are two possible outcomes that always follow.

If the price ceiling is above the price that would have existed in the free market, then the price ceiling has no effect.

When a price ceiling is set by the government, the message to suppliers is that they can’t charge more than the ceiling price for goods that they gave up value to secure and make available to a random market. Naturally, no supplier would want his output prices to be administratively determined when his input prices are subject to market forces especially when some of the inputs are imported.

Socialist-oriented people erroneously believe that putting a price ceiling that is below the free market price helps the poor when in reality it is the poor that pay a higher price under price control regimes.

Price equilibrium ensures that voluntary sellers and voluntary buyers can atomistically establish the exchange value that permits a seller to give up his goods of value to a random buyer who also voluntarily gives something of equivalent value.

At the free market price, there’s a strong tendency for the amount demanded to equal the amount supplied.

The reason is that if the amount demanded systematically exceeded the amount supplied, sellers would have a strong incentive to raise the price, and if the amount demanded systematically fell short of the amount supplied, sellers would have a strong incentive to cut the price in order to sell their increasing inventory.

A price ceiling below the free-market price causes buyers to demand more than they wanted at the free-market price and sellers to sell less than they wanted to sell at the free-market price. The result: a shortage.

Prize controls and prosperity

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