Market interventions

As you might expect, if prices are prevented from functioning in this way, markets will be less able to reach equilibrium. Therefore price controls (laws that “set” prices at certain levels) will be highly disruptive. There are two types of price control: ones that set prices above their equilibrium/market-clearing rate, and those that set prices below it. When prices are kept below their market-clearing rate, we call it a price “ceiling”. This is because policymakers are trying to prevent prices from rising upwards towards equilibrium. If prices are kept above their market-clearing rate, it’s a “floor”. Policymakers are trying to keep prices artificially high.

Here’s an excellent video on the role of prices in a free market economy:

Here’s a video on minimum wages:

There are several negative consequences of a minimum wage:

• Reduction in the number of hours worked
• Reduction in other forms of compensation (such as bonus pay)
• Reduction in perks
• Workers are required to cover more of their employment costs than before – for example they have to pay for their own uniform
• Companies substitute capital for labour – capital has become relatively cheaper, so firms automate services that would have been provided by workers, or simply dispense with those services all together (e.g. petrol pump attendants, movie theatre ushers, etc.)
• Training becomes harder to receive – firms are unable to offer training to those workers willing to accept lower wages
• Employed workers become less mobile because they’re less likely to find a job if they move location

Here’s a video on rent control:

Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities

Assar Lindbeck

Some common consequences of rent control are as follows:

• Black markets where buyers and sellers trade at prices closer to the market equilibrium
• Reduction in the future supply – due to potential supply being substituted into more profitable ventures
• Fall in quality – landlords will have less pressure to maintain the quality because they are in a stronger bargaining position
• Long waiting lists
• Bribery of those with discretionary ability to allocate resources (in the case of housing this may be city officials; it could just be a university housing officer)
• Inefficient use of existing supply – you might have a small family in a large apartment, and large families in small apartments because neither want to give them up
• Reduction in the mobility of incumbents – if people are enjoying subsidized housing, they’ll be less likely to move

If you ever wondered how Monica and Rachel can afford such an amazing apartment, on such low salaries, now you know!

In 2020 Berlin adopted rent control and, as economists predicted, it didn’t work. As Andreas Kluth points out in that article:

In a shortage, regulating the price [of a good] only trades one expression of scarcity (high prices) for another (empty shelves).

Perhaps the key lesson of economics is that you cannot escape scarcity.

Another important example of a price control is anti-price gouging laws. These are designed to prevent prices from spiking following natural disasters and are intended to protect consumers from exploitation. It is typically seen as “unfair” if producers profit from an emergency. But consider the consequences of keeping prices at pre-emergency levels. Firstly, the new situation means that people will be willing to pay more than they did before. If the price remains constant this leads to an increase in consumer surplus and thus creates an incentive to buy more of the good. This hoarding will result in a shortage, and give an advantage to those who are first in line, at the expense of those who arrive later. Secondly, it will reduce the incentive for suppliers to respond. In an emergency, costs are likely to rise and if the price remains the same, profit will fall. Both of these factors will reduce the availability of goods. Encouraging non-essential purchases to be made and reducing the incentives for potential supplies are the opposite of what is needed to coordinate resources.

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