« Picture Of The Day - Free At Last! Edition | Main | Polling numbers just don't add up »

Why Price Controls Don't Work

When prices spike as they have with gasoline, lawmakers who don't understand the free market think enacting price controls will solve the problem. In reality, price controls do the opposite, as the lawmakers in Hawaii learned the hard way:

Hawaii's gasoline price controls have sputtered to a stop. The island state whose drivers pay the highest pump prices in the nation has given up on price caps after an eight-month, first-in-the-nation experiment. Some complained that the restrictions actually led to higher prices, because oil companies knew they could charge up to the maximum allowed.


"In a lot of people's minds, they thought the gas cap wasn't working," said Republican state Sen. Paul Whalen, a strong supporter of the price controls. "It was hard to generate lots of support for it because we're paying more than we ever were before."

Gas is particularly expensive in Hawaii because of high state taxes and because of the costs of transporting oil across the Pacific. Last fall, Hawaii became the only state to cap the cost of fuel to try to give some relief to motorists.

Under the price control legislation, Hawaii set weekly caps on wholesale gas prices. Those caps were based on the average of prices in Los Angeles and New York and on the Gulf Coast. Then allowances were added for what it costs wholesalers to ship to Hawaii and distribute gas to more remote islands.

But there was no cap on the markup added by gas stations.

With regular gasoline climbing past an average of $3.38 per gallon in the past few weeks, lawmakers sent Republican Gov. Linda Lingle a bill last week to suspend the controls. She signed it on Friday.

When will lawmakers learn? Price controls never work. As the citizens in Hawaii realized, they were paying more for gas than they ever did. Additionally, price controls discourage the production of a product while encouraging its consumption, creating shortages.

In a free market, the price fluctuates based upon supply and demand, which means that when a product is plentiful and demand is low, the price is low. If a product is limited but demand is high, the price goes up, ensuring that plenty of that particular product is available for purchase.

According to the state's Department of Business, Economic Development and Tourism, Hawaii's motorists spent $54 million more on gas because of the price controls.


TrackBack

Listed below are links to weblogs that reference Why Price Controls Don't Work:

» bRight & Early linked with First Cup 05.09.06

Comments (24)

Yeah.... (Below threshold)
Kirk:

Yeah.

Why backloaded taxes will b... (Below threshold)
ABRAXAS:

Why backloaded taxes will become due when Bush is safely out of office. Didn't create the amount of jobs necessary to sustain growth.
In other words, You College kids are looking at Less Degreed Jobs and more, well less "enlightening" work.
Say isn't Unchecked Das Kapitalsim Great?
Sure you have a job, what about your Kids in College?
Privatization [neo-liberalism with a GOP cloak]

The Bureau of Labor Statistics payroll jobs report released May 5 says the economy created 131,000 private sector jobs in April. Construction added 10,000 jobs, natural resources, mining and logging added 8,000 jobs, and manufacturing added 19,000. Despite this unusual gain, the economy has 10,000 fewer manufacturing jobs than a year ago.

Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.
Neither does backloaded taxes.
i HOPE THE
During 2001 and 2002 the US economy lost 2,298,000 jobs. These lost jobs were not regained until early in February 2005. From February 2005 through April 2006, the economy has gained 2,584 jobs (mainly in domestic services).

The total job gain for the 64 month period from January 2001 through April 2006 is 7,000,000 jobs less than the 9,600,000 jobs necessary to stay even with population growth during that period.

BTW what is a FREE market when Lobbyists create the Laws, which create a new business, such as Net Neutrality. Or Say the Reservations, [Casinos$$]
money went to Abramoff and other lobbysists
to create Bills, to bring Broadband into the reservations.

As YOU CAN SEE, a BILL makes $$$
A BILL costs $$$$
A Lobbyist takes $$
A Senator takes $$$
A CEO Gives $$$ to above, then turns around
and profits off the "FREE MARKET" $$$$$$$$$$$

Which isn't a FREE market, it's TAXPAYERS money, [you $and$ me] That builds the "SYSTEM" for the Indians. WHo Pays? You and Me.

Did you vote for this Bill? No? Why then it wasnt a FREE MARKET was it? WHy NO. Was it open to ALL Contractors and Businesses? WHy NO it wasn't.
Its The 'Good old Boys' of Free Market right?
And you think THAT the Lawmakers don't know economics of FREE MARKET? Sure they do, it just ISN"T profitable so they dont INDULGE IN IT.

See, that weren't so hard to see was it?

John 1;1
Aetzi

The Bureau of Labor Statistics payroll jobs report released May 5 says the economy created 131,000 private sector jobs in April. Construction added 10,000 jobs, natural resources, mining and logging added 8,000 jobs, and manufacturing added 19,000. Despite this unusual gain, the economy has 10,000 fewer manufacturing jobs than a year ago.

Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

During 2001 and 2002 the US economy lost 2,298,000 jobs. These lost jobs were not regained until early in February 2005. From February 2005 through April 2006, the economy has gained 2,584 jobs (mainly in domestic services).

The total job gain for the 64 month period from January 2001 through April 2006 is 7,000,000 jobs less than the 9,600,000 jobs necessary to stay even with population growth during that period.The Bureau of Labor Statistics payroll jobs report released May 5 says the economy created 131,000 private sector jobs in April. Construction added 10,000 jobs, natural resources, mining and logging added 8,000 jobs, and manufacturing added 19,000. Despite this unusual gain, the economy has 10,000 fewer manufacturing jobs than a year ago.

Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

During 2001 and 2002 the US economy lost 2,298,000 jobs. These lost jobs were not regained until early in February 2005. From February 2005 through April 2006, the economy has gained 2,584 jobs (mainly in domestic services).

The total job gain for the 64 month period from January 2001 through April 2006 is 7,000,000 jobs less than the 9,600,000 jobs necessary to stay even with population growth during that period.

Allow me to shorten this ra... (Below threshold)
ABRAXAS:

Allow me to shorten this rather long post above for those whom don't read posts in entirety;


Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain.

Hmm...Well I think it's about time you started praciticing your new work motto.

"Welcome to Jack in the Box, may I take your Order?"

"Well I think it's about ti... (Below threshold)
Toddk:

"Well I think it's about time you started praciticing your new work motto."

Which sounds like something you should look into since it seems that you can't even cut-n-paste correctly.

Allow me to shorten this... (Below threshold)
James Cloninger:

Allow me to shorten this rather long post above for those whom don't read posts in entirety;

I can shorten your post even further:

I'm posting some long cut-and-paste screed that has nothing to do with the thread topic at hand

Glad to help.

too expensive!it's i... (Below threshold)
jane:

too expensive!
it's inconvenient.
i wonder this problem will be solved before long

Allow me to follow Toddk an... (Below threshold)

Allow me to follow Toddk and James' lead and also present the Reader's Digest Condensed version:

I'm going to cut and paste a bunch of stuff from all over the place and try to hang it all together. And to make it even more incomprehensible, I'm going to occasionally only take half sentences ("Neither does backloaded taxes. i HOPE THE During 2001 and 2002 the US economy lost 2,298,000 jobs."), randomly capitalize letters ("WHo Pays? You and Me. Did you vote for this Bill?") and stick symbols into words that will make me look pseudo-clever ("Which isn't a FREE market, it's TAXPAYERS money, [you $and$ me] That builds the "SYSTEM" for the Indians." -- hey, a trifecta!)

You wanna rant like that, Abby, sign up for the Bomb Squad. That way we can laugh at you as fully as you deserve.

J.

Wow. Leave it to a lefty..... (Below threshold)
docjim505:

Wow. Leave it to a lefty... I don't think I've ever seen a comment thread get hijacked and run right off the (left) side of the road quite so fast as this one did.

Way to go, Abby!

/sarcasm

Back on topic...

Wonder how many people will watch the Hawaii experiment and think, "Hmmm... I used to support price caps, but now I'm not so sure"?

Probably not too many. They are so seductive: "See? We in the government Care(TM). We'll make sure that those b******s in the Big Oil companies don't set the prices too high."

I believe that NYC has been doing this kind of thing since World War II with rent controls. The result is that lucky people get a nice apartment at a VERY attractive price, but everybody else gets screwed. Why? Because once the profit motive is removed, businesses have no incentive to build more apartments... or even keep the ones they own in especially good repair.

What motivation is Hawaii giving to the oil companies to ship in more gas, or expand their terminal and storage facilities to try to increase the supply?

None.

And, as the article points out, the oil companies can charge the maximum price even when this is higher than they would normally charge (hey, didn't this kind of thing happen to the electricity market in California a few years ago?).

When will people learn: government intervention in the markets is seldom a good thing, and should only be allowed to guarantee public health and safety.

More to the point:... (Below threshold)
Jay Tea:

More to the point:

Set price ceilings quickly become set prices. As docjim pointed out, price controls not only set the maximum price of the commodity, but also attack the factors that lower the price. Not to mention that once the cost of supplying the commodity exceed the set price, then that commodity simply stops being sold. Period. No company is going to spend $4.00 a gallon to bring gas to Hawaii only to sell it for $3.50.

J.

It's very frustrating, they... (Below threshold)

It's very frustrating, they'll never learn. ;-(

Lots of stuff on the topic at my blog:
http://amateureconblog.blogspot.com/

Off topic, but needs to be ... (Below threshold)
Fred Wilson:

Off topic, but needs to be addresed....

You obviously are not familiar with the NYC Real Estate market. Businesses have plenty of incentive to build new apartments in NY. It's all they do. NYC is one big construction site for high end rentals and swanky condos. Rent controls are the one thing keeping some diversity in the city and has not affected supply or demand AT ALL. Just ask the 4 post-college students crammed into a one bedroom each paying $800/month in rent.

The point is that with the right market conditions, subsidy and price control can help some, but leave plenty of room for profit for everyone else.

We get a yearly example of ... (Below threshold)
MikeB:

We get a yearly example of how 'well' price controls work during hurricane season (Florida has 'price gouging' laws).

The role of prices in a free market economy is to efficiently allocate scarce resources with alternative uses. That is, a rising price pulls resources from areas where there not needed as badly (which is to say, where the price is lower) to an area where they are needed more badly (which is to say, where the price is higher). In short, prices function to allocate.

By suppressing the metric of allocation (prices) via a price cap, you're essentially requesting less than you 'need' (as defined by what the price would be without the cap).

Belief in the value of price controls is another example of how our government education system is failing us.

- MikeB

Just as Hawaii discovered, ... (Below threshold)
Corky Boyd:

Just as Hawaii discovered, price controls actually contribute to increased prices.

Here's another example and it came from the era of the Nixon price controls in the early seventies.

My company, a newspaper that was struggling in a competitive market, had signed labor agreements, as had our competitor of 8-10% annual increases. We had planned commensurate price increases to cover the costs. Then came price controls.

Now our two primary costs were not covered by price controls: labor (union cotracts had been exempted) and newsprint (paper) imported from Canada. Could we raise our prices to cover known cost increases? No, we had to wait 9 months to prove our costs had gone up, then apply to a government bureaucracy, wait another 2-3 months, and then be told what we could charge. The fact we were teetering on insolvency counted for nothing.

When we got the go ahead, did we debate whether we should take the full increase. Of course not. Under price controls, as in Hawaii, the allowed price becomes per se the minimum as well as the maximum price.

One aside. During this time, I observed how restaurants handled the situation. They either gave smaller portions, cut hours or simply dropped menu items that became unprofitable. The market always has a way to reassert itself, no matter what bureaucrats want.

In answer to a prior post lauding rent controls or rent stabilization in NYC. Many of these apartments are dissapearing into the co-op/condo market, or are being torn down. Again, the market will always reassert itself.

"An elephant is a mosquito ... (Below threshold)
astigafa:

"An elephant is a mosquito built to government specifications." -- Robert A. Heinlein

Hawaii could have learned t... (Below threshold)
JEW:

Hawaii could have learned their lesson if they had peered into history a few years back and studied what happen to California.

Jay Tea,I was with... (Below threshold)
Lee:

Jay Tea,

I was with you after reading the post, but you lost me when you posted this comment above:

Not to mention that once the cost of supplying the commodity exceed the set price, then that commodity simply stops being sold. Period. No company is going to spend $4.00 a gallon to bring gas to Hawaii only to sell it for $3.50.

Form what I think I read in the article linked in your post, the price of gasoline in Hawaii was determined by the formula Hawaii gasoline cost = (cost of L.A. gas + cost of transporting gas to Hawaii).

Therefore the cost of gas in Hawaii under price controls would never be less than the cost to produce the gasoline unless the company was selling gasoline in L.A. for less than it costs to make it.

As I said, I was with you after reading your post, and I'm not an advocate of price controls under the current situation - but now I'm wondering why the red herring in the comments section?

In the last couple of weeks this blog is averaging approx one post a day praising the oil companies and slamming any suggestion of oil company "wrong doer-ing".

Is Wizbang! so blindly tied to the current Republican movement in this country to screw the American public at the gas pump before the Republicans are voted out of control that you will say just about anything to help that cause?

Just curious....

Don't like the oil companie... (Below threshold)
Toddk:

Don't like the oil companies making a "obscene" profits get rid of your gas guzzlers. Quit driving like a moron. You know for all the bitchin' and moanin' about gas prices I sure don't see people acting like it's soooo expensive. Still taking off from the lights like the start of an F-1 race. Still trying to run your ass over if you're going less than 70 on the interstate. etc. etc.

If I see another freaking moron on tv complaining about gas prices while filling up her suv for THE DAMN COMMUTE...

People need to start taking themselves to task for their own bad choices in life. I mean come on how many people driving any kind of gas guzzler REALLY need that kind of vehicle?

Just curious Lee? why would... (Below threshold)
virgo:

Just curious Lee? why would the Republicans/movement choose to screw the american consumers at the gas pump with an election coming up? if they felt this way they could repeal the tax cuts and have a lot more money then what they are screwing the people out of now? plus they would have the dems on thier side as well. so it really makes no sense ..oh whatever.

"why would the Republica... (Below threshold)
Lee:

"why would the Republicans/movement choose to screw the american consumers at the gas pump with an election coming up?"

Because the wholsesale loss by the Republicans in the upcoming elections is a "given" at this stage, Virgo, and they apparently aren't even bothering to hold up populist pretenses anymore.

Because the wholse... (Below threshold)
Marc:
Because the wholsesale loss by the Republicans in the upcoming elections is a "given"
Can we assume, given your talent to predict the future (if only in your own mind), that your family tree includes The Amazing Kreskin?
Toddk,Bingo... (Below threshold)
docjim505:

Toddk,

Bingo. When I stop seeing advertisements for Hummers and Durangos and the like, and stop seeing quite so many of them on the roads, THEN I'll know that the price of gas has gotten really painful and people are starting to respond to it.

I recall when gas prices were high back in the '70s. People started trading in their big Buicks and Fords and Chevies for odd-looking little cars with strange names like Honda, Toyota, and Datsun.

For those of you who are feeling the pinch or who want to do what they can to sock it to those greedy b******s in the big oil companies, here's what you can do:

--- Cut back on non-essential driving.

--- Car pool when possible.

--- Use mass transit when possible.

--- Plan your trips so you make many stops instead of many separate trips.

--- Buy a more fuel efficient car.

WOW! People did this back in the '70s. No reason people today can't do it, too.

We don't have a right to cheap gas.

Marc,All you need ... (Below threshold)
Lee:

Marc,

All you need to do is look at the polls.

Oh, wait minute, I forgot. When the polls spell bad news for conservastives it's time to dis the polls.

Lol, how predictable.

Actually Lee the funny thin... (Below threshold)
Toddk:

Actually Lee the funny thing is as badly screwed up the Rep. party is that the Dems are even more f'd up. Why do you think they still haven't taken back control of either of the chambers in congress or the White House.

"When will people learn: go... (Below threshold)
John S:

"When will people learn: government intervention in the markets is seldom a good thing..."

Kind of scary what a Democrat-led Congress could do to us next year. Get ready for $4 a gallon AND 8- hour gas lines.




Advertisements









rightads.gif

beltwaybloggers.gif

insiderslogo.jpg

mba_blue.gif

Follow Wizbang

Follow Wizbang on FacebookFollow Wizbang on TwitterSubscribe to Wizbang feedWizbang Mobile

Contact

Send e-mail tips to us:

[email protected]

Fresh Links

Credits

Section Editor: Maggie Whitton

Editors: Jay Tea, Lorie Byrd, Kim Priestap, DJ Drummond, Michael Laprarie, Baron Von Ottomatic, Shawn Mallow, Rick, Dan Karipides, Michael Avitablile, Charlie Quidnunc, Steve Schippert

Emeritus: Paul, Mary Katherine Ham, Jim Addison, Alexander K. McClure, Cassy Fiano, Bill Jempty, John Stansbury, Rob Port

In Memorium: HughS

All original content copyright © 2003-2010 by Wizbang®, LLC. All rights reserved. Wizbang® is a registered service mark.

Powered by Movable Type Pro 4.361

Hosting by ServInt

Ratings on this site are powered by the Ajax Ratings Pro plugin for Movable Type.

Search on this site is powered by the FastSearch plugin for Movable Type.

Blogrolls on this site are powered by the MT-Blogroll.

Temporary site design is based on Cutline and Cutline for MT. Graphics by Apothegm Designs.

Author Login



Terms Of Service

DCMA Compliance Notice

Privacy Policy