Thursday, November 1, 2007

Price Controls make a Comeback...

Price controls are making a comeback, in Argentina, Russia, and China. as I've argued before this is a bad idea. Let me recount my two main objections briefly.

First, price controls do not generally work. If they succeed in preventing prices from rising, then shortages will inevitably result. I'd rather pay "too much" for a good or service than fail to be able to buy it at all because the supplier has run out! (If a supplier runs out of a product, the effective price is infinity- which can hardly be thought of as successful if your objective was to prevent prices from rising! Normally, however, the black market ensures that one can still purchase price controlled goods- perhaps at an inflated price- even when shortages result).

Second, even if they did "work" by prevening prices from rising, they do so from distorting the price signals that are essential for efficient resource allocation.

In the end, too high inflation results from one and only one cause: too lax monetary policy. As Milton Friedman famously said "Inflation is always and everywhere a monetary phenomenom." Indeed, for high inflation countries there is approximately a 1-for-1 relationship between money supply growth and inflation, although the link is less than proportional for lower inflation economies.

See my earlier post for more.

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