Here’s a letter to a new correspondent:
Thanks for your e-mail.
You write that, in my letter of yesterday, I “neglect a critical part of Isabella Weber’s case for using price controls to fight rising prices. That part is Professor Weber’s detection that many prices today like prices in wartime are monopoly prices.”
You’re correct that in my letter I didn’t mention Prof. Weber’s assertion that many prices are rising today as a result of what she calls a “temporary monopoly.” But contrary to Prof. Weber’s belief that the existence of temporary monopoly power justifies price ceilings, quite the opposite is true.
What she calls a “temporary monopoly” is more accurately described as a market many outputs of which are reduced by calamities such as covid and war. The resulting higher prices not only reflect these greater scarcities, they also incite suppliers to exert more efforts to increase quantities supplied, and incite buyers to further economize on their uses of these goods until more supplies arrive.
Price controls would obstruct this vital role of prices. Allowing prices to rise is especially important when goods are in unusually short supply. The higher prices charged by firms that Prof. Weber describes as possessing a “temporary monopoly” is the very nectar that attracts more firms and resources into those lines of production. And only by attracting more firms and resources into those lines of production will existing firms’ ‘power’ to charge unusually high prices be destroyed without simultaneously causing shortages.
In short, to impose price ceilings as a means of dealing with temporary monopoly power is to remove from the market the essential ingredient that will spur the more-intense competition that’s necessary to rid the market of monopoly power.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030