The Effect of Price Controls On The Supply of Goods.
To analyze this further, we must look at the role of prices in the market. Why do things cost the amount that they do, and who dictates these prices?
All things held equal, we see that supply and demand dictate prices. Since goods are scarce, there must be a tradeoff to obtain them; if all goods were scarce, and free, then goods will not exist anymore since they all will be consumed without restriction.
Suppose that in a city, gas demand is high and/or gas supplies are low. If the government takes no action and leaves the market to work, as the supply shortens, the prices will rise. Consumers will buy gasoline for the most important uses only.
Let us consider however if the government puts a price ceiling on the gasoline. The supply is low and so is the price. Consumption will remain high, exacerbating the existing shortage. We can see that the intervention benefits the first buyers at the expense of those who need it most. As such, the very government policies that are meant to help people are hurting them.
Supply, Speculators/Arbitrageurs, and Prices.
“Buy low, sell high”
Basic knowledge of supply and demand shows us that when prices are low, there is either: 1) low demand, or 2) high supply; high prices are brought about by either 1) high demand, or 2) low supply. The speculator buys a supply of X goods in areas in which they are low priced (abundant) and sells those goods in areas where they are high priced (low in supply). For example, let us say that city X has an abundant supply of cows and dairy factories, and city Y doesn’t. The cost of milk in city X is very low, while in city Y it is very high. The role of the speculator is to seek mere profit. By buying for a low price and selling it at a high price he will gain large returns.
A deeper look into this reveals that the speculator is moving the supply from city X to city Y. In turn, city Y benefits from lower prices of milk, while city X’s prices rise only by a little (since the supply is already abundant anyway). Eventually, as time goes forward, the constant movement of supply from one place to another equilibrates the market. City X and city Y’s milk supplies will become similar, and prices will become similar; hence, speculation [deleted extra word “merely”] makes the free market work faster and more efficiently.
Speculation has a major role in natural disasters, famines, etc. When there is a major change in the supply of a good, speculators help move the supply of a good, for example, gasoline, from a city that has abundance, to a city in need. To examine the effect of price control, let’s say that city Y with low supply institutes a price cap to make their price the same as of city X. City Y will run out of supply very quickly, and since there is no price indicator (it stays the same due to the price ceiling), speculation will not exist, and supply will not be moved about. The price no longer indicates the supply of the good because it is government controlled. City Y will run into great milk shortages, while city X will have vast amounts of milk that it may not even need.
“New Jersey has a tough price gouging law to ensure that profiteers will not take unfair advantage of people at their most vulnerable — those who have been displaced from their homes, have limited resources, and are seeking fuel, shelter and the basic necessities of life,” said Governor Chris Christie in the Friday following hurricane Sandy.
Governor Christie is correct when he says that prices rise because of profit seeking stores; however, motives aside, as we have seen the higher prices lead to even and fair distribution of supply to the consumers who need it most. While the profiteer is only seeking a profit by raising prices, he is also instilling an unintended effect upon the economy: fair and even distribution of resources to the consumer.
By imposing his price laws, Governor Chris Christie has hampered the functioning of New Jersey’s economy. This governor sued distributors of goods because of his lack of economic understanding. One cannot simply ignore supply and demand in the use of government regulations. By imposing these regulations the market will no longer adjust according to consumer needs and distribution of resources will be uneven. Supply will run out in the times of crisis and many people will suffer.
This is the perfect case of unintended consequences.
Speculation aids in the quick equilibration of the market; price regulation obstructs economic recovery.
Written by: Kelvin Silva
Edited by: Rachel Lindsay