Price Controls: The Greatest Hits I
Economists thought price controls had been vanquished, but we live in a world where people are warming up to them. In this series, based on an article originally published at The Independent Institute, I'll revisit some of the craziest consequences of price controls.
Price controls redistribute income and wealth between parties, often in unexpected ways.
The infamous Nixon gasoline price controls, were implemented in August 1971. To keep rural gas station owners from being wiped out, the controls had not stipulated a nationwide maximum price but instead, prohibited gas stations from charging a price higher than the highest price a station had charged in May 1971.
Yoram Barzel brilliantly elucidates what followed. Gasoline is heterogeneous. There is low-octane gasoline and high-octane gasoline. Unsurprisingly, high-octane gas commands a higher price than low. Under Nixon’s price ceilings, sellers of high-octane gas began to replace it with low-octane gas. All the while, they kept charging the same price.
How was this the profit-maximizing strategy? Those with a high opportunity cost of time were willing to pay the high price for low-quality gas. After all, their alternative was to wait long hours in line for the same-quality gasoline at a marginally lower money price. Those who’d sold high-quality gasoline saw their costs fall (they didn’t have to buy the good stuff), while their revenues stayed the same, or even rose a little. In the end, the Nixon price controls redistributed income from low- to high-end gasoline sellers.
Price controls redistribute in more indirect ways too. Rent control, for instance, sometimes serves as a subsidy to wealthy city-dwellers. As Henry Hansmann notes in his underrated Ownership of Enterprise, “By driving down the rate of return on rented apartments, rent control creates a strong incentive for forming cooperatives and condominiums.”
Housing for the rich, which includes dwellings such as luxury apartments and condos, is typically exempt from rent control. Hansmann argues that rent control was an important influence in the spread of alternative housing options in post-WWII Western Europe. Other things equal, rent control is a handout to the rich.