Arguments for Price Ceilings

Without price controls on oil in 1973, some people might not have been able to afford to heat their homes. Without rent controls, some people may not be able to afford appropriate housing. It’s not obvious that the poor are better off with shortages than with high prices. Nevertheless, if price controls were the only way to help the poor, then this would be an argument in favor of price controls.

Price controls, however, are never the only way to help the poor and they are rarely the best way. If affordable housing is a concern, for example, then a better policy than rent controls is for the government to provide housing vouchers. Housing vouchers, which are used extensively in the United States, give qualifying consumers a voucher worth, say, $500 a month that can be applied to any unit of housing.15 Unlike rent controls, which create shortages, vouchers increase the supply of housing. Vouchers can also be targeted to consumers who need them, whereas rent controls in New York City have subsidized millionaires.

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There are a few other sound arguments for price controls. The best case for price controls is to discipline monopolies. Alas, this explanation does not fit price controls on gasoline, apartments, bread, or almost all of the goods that price controls are routinely placed on. We will look at this special case more extensively in Chapter 13.

One of the primary reasons for price controls may be that the public, unlike economists, does not see the consequences of price controls. People who have not been trained in economics rarely connect lineups with price controls. During the gasoline shortages of the 1970s, probably not one American in ten understood the connection between the controls and the shortage—most consumers blamed big oil companies and rich Arab sheiks. Americans are not alone in blaming shortages on foreigners. The demand for price controls is a recurring and common event in history. Consider, for example, the situation in Iraq in 2003:

The line of cars waiting to fill up at the Hurreya gas station on Monday snaked down the right lane of a busy thoroughfare, around a traffic circle, across a double-decker bridge spanning the Tigris River and along a potholed side street leading to one of Iraq’s three oil refineries.

At the end, almost two miles from the station, was Mohammed Adnan, a taxi driver who could not comprehend why he would have to wait seven hours to fuel his mud-spattered Chevrolet Beretta. “This is Iraq,” he noted wryly. “Don’t we live on a lake of oil?”…

“Maybe it’s the black marketeers,” Adnan said. “They’re taking all our fuel.”

Bayar was more certain. “It’s the refineries,” he said. “They’re not producing enough gasoline.”

Iraq, 2003 Gasoline was a bargain at 5 cents a gallon. If you could afford the wait.
PAULA BRONSTEIN/GETTY IMAGES

The driver of the next car in line scoffed at both explanations. “It’s the Americans, for sure,” said Hassan Jawad Mehdi. “They are taking our oil back to America.”16

Each of these explanations might help to explain why Iraq in 2003 was producing less gasoline than before the war. But reductions in supply create high prices, not shortages. To generate a shortage, you need a price control, and in Iraq in 2003 the price of gasoline was controlled at 5 cents per gallon.17