A Strange Ignorance of the Effect of Price Caps

Source: EconLog
by Pierre Lemieux

“When a price is capped under its market equilibrium level, what happens? Few people seem to know the answer except for economists. And even some economists do as if they didn’t know, perhaps distracted by their, or their bosses’, ideology. The answer: price caps create shortages, that is, the stuff disappears from the shelves, waiting lines form, and illegal suppliers are the only recourse if you can’t wait or go without. We had many examples of this during the Covid emergency. It is easy to see all that on a simple supply-demand graph: quantity supplied decreases while quantity demanded increases. … For the consumer, there is one thing worse than a price increase: it is to find no supplier, which is exactly what a price cap and a shortage entail.” (02/12/24)