In our previous discussion, we talked about price floors, and the dangerous nature of these price fixtures. They are used with the intent to limit supply, and have a secondary effect of migrating demand away from any certain product. Price floors claim to help the downtrodden by making sure a “decent living” can be made and fixing prices so they cannot go any lower than any set price. However, price floors limit the free market from working effectively, and can completely decimate a market for a product by forcing a community to move to substitutes. Today, we will talk about price ceilings, why they’re enacted, and what effects they have on an economy.
What are price ceilings? Price ceilings are the exact opposite of price floors, with the government setting a price or wage that companies cannot charge any more than for their product or service. This price or wage is almost always below the market price at the time; otherwise, it would serve no purpose. Price ceilings are often used to “guarantee” services for the poor and underprivileged in a community. What is fascinating about price ceilings is that they produce precisely the opposite of what they promise; they promise goods for all, but what they actually produce is a shortage for any given product in a market.
A price ceiling’s road to becoming law is a very simple road to travel. “We cannot afford the rent in Manhattan,” says the poor community, “and we see that there are plenty of apartments and office spaces for sale in the City. If we cannot afford rent, then we will be homeless, and none of us want that, right? Therefore, there should be a limit on how much the greedy landlord can charge for a single apartment or office space so we don’t have to be homeless.” The community’s reaction is similar to that of the apple community in the story about price floors; they grasp at their hearts with a new, but unjustified hatred for the “greedy” landlord, and vote for, say, elected official Smith, who promises to enact price ceilings and “save the poor” in his community from the evil landlords. Once the price ceiling is enacted, the community rejoices, happy that they can serve their fellow man and teach those greedy businessmen a lesson. Rent is now held way below market price, and the new price is affordable to everyone.
There are so many things wrong with the economics of price ceilings that it may be hard to follow. The first thing is a simple generalization about price ceilings, and that is that while price floors limit supply while inadvertently limiting demand, price ceilings limit demand while inadvertently limiting supply. When a price ceiling is set for, say, apartment rent, usually called rent control, it allows the poor and working classes to buy living space. However, it also allows the customers with the highest purchasing power to acquire more of it than they did before. In the end, this leads to a shortage of apartments to rent, thus stopping demand from growing, because those with the most purchasing power have acquired more apartments and larger living spaces for less money. Ultimately, those with the least purchasing power cannot buy any living space for themselves because there are no more apartments on the market for them to purchase.
On the other side of the equation, let’s take the perspective of a family who just moved to Manhattan on business. They cannot find a living space either, because no matter how much purchasing power the family has, they are unable to rent or buy any property. Let’s also not forget the people who used to rent out penthouses and luxury apartments; they are now out of business because they cannot afford to rent out their properties for the absurdly low price ceiling. Supply in the luxury housing market has been severely hurt, if not completely decimated.
These are the primary ways that price ceilings hurt an economy. They allow the ones with the most purchasing power to buy more while not allowing the poor to buy any. They also restrict supply, creating a shortage in the market. Price ceilings hurt the producer as well, because now that there is a price ceiling, it serves no purpose to provide luxury products. To do so would prove unprofitable and completely pointless. Price ceilings do more harm than good to an economy, and even though this has been proven many times, there are still politicians who swear by the price ceiling theory, saying that it has the power to “save the poor” and “equalize the purchasing power of all classes.” If price ceilings are anything, they are policies that have been heavily recommended by the wealthy in an area to gain more of something at the expense of someone else.
To conclude this two-part series about government price control, we must remember that the free market is not to be trifled with. Laissez-faire capitalism is a mystical machine that has the power to uplift people out of poverty and into the ranks of the upper classes, create new products and innovate beyond our wildest dreams, and create a stable economy for all of us to enjoy. Unfortunately, this idea has been perverted for the past 200 years to mean something completely different than “free-market;” it has become “government-regulated market,” and consumers and producers have paid the price for the government’s interference in the economy. This is not the Austrian’s way of thinking; this is the economist’s way of thinking, but economics itself has been perverted to pursue government regulation with good intentions, ignoring the terrible side-effects of government intervention, blindfolded by arrogance and self-preservation. This series was written in an attempt to reverse what has happened to economic thought, help the citizens of this country realize what is being done to their economy, and how much better life could be without government intervention in the market.