Here’s a letter to the Wall Street Journal:
Editor:
In “As Europe Caps Energy Bills, the Merits of Price Controls Get Another Look” (Oct. 10) you report on University of Massachusetts Amherst economist Isabella Weber’s support for energy-price controls. As you describe, Prof. Weber reasons that “unlike some other goods and services, households need energy to subsist, and how much they consume is relatively insensitive to changes in prices, or, in economic terminology, ‘inelastic.’ This means price caps would protect consumers without encouraging them to consume significantly more and exacerbate shortages.”
I weep for my profession – or at least for Prof. Weber’s students.
First, Prof. Weber ignores the second law of demand, which says that as time passes consumers adjust to price changes in ways that do significantly affect the quantities consumers seek to purchase. Upon discovering that gasoline prices have risen over night, the worker driving a honkin’-big SUV to his job 15 miles away can’t today easily avoid fueling his gas-guzzler in order to get to work. But over time he and other motorists will respond to higher fuel prices by switching to more fuel-efficient vehicles, moving closer to work, and making countless other adjustments that result in them buying much less gasoline.
Second, Prof. Weber astonishingly ignores the supply-side impact of price controls. If government keeps energy prices artificially low, energy producers have no incentive – unlike if prices rise – to increase the amounts they supply. So even if (contrary to fact) Prof. Weber is correct that the demand for energy is so inelastic that higher prices never significantly reduce the quantities that consumers seek to buy, keeping energy prices artificially low results in sellers bringing to market fewer quantities than they would bring at higher prices – meaning, practically, fewer quantities than consumers demand at the artificially low prices. The inevitable result is shortages.
I don’t know Prof. Weber’s age, but if she’s too young to recall the 1970s all she must do is to google “1970s gasoline lines” to see powerful evidence of the calamitous shortages caused by energy price controls.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
