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October 24, 2009

Why Price Controls Create Shortages, II

Following up on an earlier post of mine that explained why price controls inevitably create shortages, Ed Morrissey deftly wields the clue bat to good effect:

Fixing prices does not lower costs. Let me repeat that: fixing prices does not lower costs. “Costs” are borne by providers, who get reimbursed by either consumers (in a rational market) or by third parties (American health care) for their goods and/or services. In a competitive market, providers have to set their prices at an attractive level in order to get business without missing out on profit opportunities, but their prices have to cover their costs — or they go out of business.

Not coincidentally, the latter is what happens when price-fixing is used. When government fixes the price of goods and services, it usually does so to mask costs, not reduce them. This is what Medicare has done for years, which is why doctors avoid Medicare patients now. When the fixed price becomes less than the actual cost to provide the service, the provider is forced out of business.

As I said the other day:

Prices operate as signals in a free marketplace, efficiently allocating goods to those who want them and are able to pay for them. Few Americans would accept the proposition that we don't need information to make intelligent decisions and yet too many Americans buy off on the notion that markets will operate efficiently if the federal government restricts the free flow of information between consumers and producers.

The idea that government bureaucrats have either the time or ability to set prices and respond to fluctuations in supply and demand for literally thousands of medical services is just plain laughable. What has Congress ever managed efficiently?

In a free market, this process happens automatically. There are no lengthy delays while Congressional committees study the issue to death.

Rationing, in some form or another, will always exist. In a free market rationing takes place when there are more potential buyers of a good or service than willing sellers. If there aren't enough sellers to satisfy demand, obviously not everyone who wants to buy will be able to.

But in a free market, these buyers are then able to perform an important set of calculations: just how badly do I want this good or service? How important is it, compared to other goods and services? What other, less important purchases might I forgo in order to get what I want? Do I need to work longer hours or change careers to afford the things I want? What's the most I'm willing to pay? In a free market producers, noticing that there are more buyers than sellers, are able to command a higher price and - by so doing - entice more producers to enter the market and remedy the shortage. Buyers and sellers participate in price setting and consequently prices reflect their priorities.

In a government run system with price controls, the price can never rise high enough to remedy shortages in supply. The inevitable result is a shortage of the good or service at that price. As we saw in my earlier post, the most efficient producers exit the market and gravitate to opportunities that offer a salary commensurate with their ability.

The result is a degradation in quality. Fewer providers and poorer quality: somehow, this doesn't sound like an improvement on the current health care situation.

But at least it will be fair.

Posted by Cassandra at October 24, 2009 06:40 PM

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Comments

"But at least it will be fair."

Fair? I think fairness is along the lines of "If a man will not work, he shall not eat."

Whatever that makes me, I wear it proudly...

Posted by: camojack at October 25, 2009 03:27 AM

What has Congress ever managed efficiently?

Approving its own pay raises.

Other than that -- nada.

Posted by: BillT at October 25, 2009 06:17 AM

Fair? I think fairness is along the lines of "If a man will not work, he shall not eat."

Nonsense, Camo :p

Some people are just born with a greater desire to exert themselves. Social justice demands that we adjust for exertion inequality now!

Posted by: Cassandra at October 25, 2009 07:02 AM

Is being reminded of Glorious Soviet joke extolling immeasurable benefittings of controlling of economy:

A capitalist, a socialist, and a communist agree to meet.

The socialist arrives late and says, "Forgive me, I was waiting in a queue to buy sausages."

The capitalist asks, "And what is a queue?"

The communist asks, "And what is a sausage?"

*rimsky-korsakov-shot*

Posted by: BillT at October 25, 2009 09:46 AM

What, never? Well, hardly ever. But I remember when the govt set the airline fares, and set them high. We had abundant air service and great food. Comparatively few passengers, though. Did the regulatory regime make sense for the economy as a whole? I dunno. The transportation business has strange economics; just ask the ICC (if you can find it any more). At least the airlines didn't go broke all the time.

Posted by: jules Bernard at October 25, 2009 01:37 PM

Nonsense, Camo :p
Some people are just born with a greater desire to exert themselves. Social justice demands that we adjust for exertion inequality now!
Posted by: Cassandra at October 25, 2009 07:02 AM

Praise Gaia that I'm one o' those "born with a greater desire to exert themselves."

Seriously. Well, I used to be, anyhow... ;-)

Posted by: camojack at October 26, 2009 04:05 AM

"Rationing, in some form or another, will always exist. In a free market rationing takes place when there are more potential buyers of a good or service than willing sellers. "

Cass, it's a minor point, but I would argue that this doesn't meet the definition of the word "rationing". Rationing occurs when goods and services are allocated by some means other than price signaling.

Posted by: Cousin Dave at October 26, 2009 02:47 PM

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