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The Awful System-wide Effects of Price Ceilings

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In a very real way, I’m grateful to Uncle Sam for his idiotic policy during the 1970s of putting price ceilings on energy.  Those ceilings bestowed upon me a great deal of first-hand experience with gasoline shortages and with waiting in the resulting long queues.  Those experiences were quite unpleasant.  So when I stumbled, quite by accident, into my first economics class, at Nicholls State University, in 1977 and encountered Prof. Michelle Francois’s use of supply and demand curves [2] to explain the effects of price controls, the explanation resonated with me deeply and lastingly.

Perhaps time has painted rose shades on my memories of that class.  But I recall it as being dynamic and among the most exciting and revealing lectures that I have ever witnessed.  (Pardon my self-indulgence, but here’s a picture of the classroom where I was entranced by Dr. Francois’s lecture – a picture taken this past November when I visited my alma mater, on the kind invitation of Morris Coats, to give a few lectures there.  Save for the fact that the blackboard has been replaced by a whiteboard, the room looks exactly as I remember it from 38 year ago.  Even the desks appear to be identical to the ones that my fellow students and I sat in back then.)

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Too bad Dr. Francois’s lecture wasn’t recorded for posterity.  But – as regular readers of this blog have reason to realize – the mid-1970s were a far, far less prosperous time for ordinary Americans than is the America of today.

Part of our good fortune today is that we have YouTube and a world of online courses.  Here is the just-released short video from MRUniversity on price ceilings.  It’s excellent.

One lesson (among many) that should be drawn from any such excellent economic analysis of price controls is that even prices that reflect today’s inadequate competition (for outputs, for inputs, or for both) serve a useful purpose and ought not be altered by government-imposed price controls.

For example, even if some low-skilled workers are today paid hourly wages that are below what those wages would be were there more intense competition among employers for low-skilled labor, the very lowness of these wages is a signal to other employers (existing and potential) that profit opportunities exist in the market for those firms and entrepreneurs with the talent and gumption to use this labor productively.  Even if the lots of all low-skilled worker are improved today by a legislated minimum wage that moves the wage for these workers up closer to where it ‘should’ be – where it would be – if all existing employers competed more vigorously for low-skilled workers, such legislation almost certainly harms low-skilled workers over time because it erases the signal and the incentive that would otherwise lure more employers to arrange their production processes in ways that would use more low-skilled workers.

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