Most economists oppose price controlsespecially those that occur after disasters or other unforeseen events (commonly referred to as “anti-price gouging”). But UMASS-Amherst economist Isabella Weber disagrees. she tweets: “One of the problems with (the supply and demand diagram) is that it’s missing an important aspect: time. When it comes to price gouging in an emergency, that’s a pretty big problem.” She received many responses from academics, many of whom pointed out to her that the supply and demand model is do Please consider the time. The X-axis is appropriately labeled “Quantity per unit time.” (My late, great PhD professor, Walter Williams, used to deduct points from people who wrote the X-axis as just a quantity). Moreover, over time, both demand and supply become more flexible.
While these objections are valid, I think they miss Weber’s point and the larger economic mistake she is making. Weber claims that price management If the supply of a product is fixed and has a long schedule until it becomes unfixed, deadweight loss has no negative effects. Let’s analyze her argument first on its own merits and then from a richer economic perspective.
Weber approaches this problem from the perspective of Marshallian welfare economics, which states that market performance is maximized by total surplus (profits from trade to producers plus profits from trade to consumers). determined by whether or not it is. Calculating these gains from trade is very easy. For consumers, it’s just a difference in who they are. willingly Pay according to each unit consumed and its contents must Pay for each unit consumed. For a producer, the profit from trade is the difference between the price the seller receives for each item sold and the amount he is willing to sell for each item sold. Therefore, total surplus (total profits from trade) is the sum of consumer surplus (consumer profits from trade) plus producer surplus (producer profits from trade).
Two very important points to note: 1) How much surplus is produced in the market depends on the quantity exchanged in the market. When the quantity exchanged decreases, the total surplus decreases (and vice versa). 2) Prices determine how surplus is distributed between consumers and producers. In general, higher prices mean less consumer surplus and more producer surplus (assuming all else is equal).
From a strictly Marshallian welfare economics perspective, Weber’s argument is correct. If supply is fixed (i.e., perfectly inelastic) and there is no time to increase supply or make the curve more elastic, price gouging does not create deadweight loss. Since quantity remains the same, a price ceiling simply shifts the gains from trade from producers to consumers. Total market surplus remains unchanged. There is no deadweight loss because the market quantity does not change.
But from a broader, richer economic perspective, that is, how people actually behave when faced with different choices, her point is wrong. Price controls continue to create shortages because demand exceeds supply. Although there is no deadweight loss, scarcity costs such as queuing and hoarding are still incurred. Moreover, the cost of a price ceiling lasts longer than the period because prices are kept artificially low, which prevents the supply curve from becoming elastic and/or growing. Otherwise they will. These are very real costs, and when you consider them, you see that price controls make everyone worse off, even if supply remains constant.
Therefore, if these two conditions (a price ceiling where producer surplus is transferred to consumers but consumers and producers incur much higher total costs over time, or prices rise), consumer surplus is transferred to (compared to these states), price caps still have undesirable effects, especially after disasters.
And there are many other possible objections. Michael Giberson, a retired Texas Tech University economist, said in a Facebook conversation with me that there is no particular economic justification for prioritizing consumers over producers in this (or any other) transaction. No, he pointed out. The other is that there is no reason to think that the distribution of goods to consumers will become any more “fair.”
moreover, Kevin Corcoran recently reminded uswe want to avoid the one-step thinking that permeates Weber’s argument. Price control laws have long-term effects by changing supplier incentives against Prepare for disasters. As economist Benjamin Zeicher showwartime price controls discourage producers from stockpiling for war. material In normal times. The same applies to non-defense items. Stockpiling is costly. It takes away storage space for products that could be sold faster. For companies to stockpile, they need to expect future prices to rise. If you know you won’t be able to charge a higher price in the future, your stockpiling costs will be higher than your profits. Businesses will have fewer products on hand, and when a disaster occurs, fewer products will be available in the aftermath. The best time to end price controls is before a disaster occurs. The next best time is now.
In summary, Isabella Weber’s tweet is mathematically correct, but economically incorrect. Although internally consistent and logical, it contains no economics. We always need to look beyond the model to the reality it is simulating.
John Murphy is an assistant professor of economics at Nicholls State University.
