Price control: science or fiction?
Today, I turn away from financial issues, to address a little understood economic and political issue: government price fixing or price control.
Price controls have been a strategy widely used by governments to try to curb price increases or the alleged excessive profits of trading companies. It is a mechanism that originated in war economies, or during natural disasters, to avoid shortages and abuses in the face of shortages.
Politically, price control is very popular. Urban legend tells us that Juan Varela, managed to get out of the basement of the polls for the presidency of the republic with a slogan repeated during the campaign: Price control! And it could well be, the people sympathize with price controls because they see it as a punishment to the abuser. The economic reality is different, price controls create more economic distortions than they solve. And they hit the poor hard.
What goes through a politician's mind in situations of inflation, or because they suspect excessive profit arrangements, is to put a ceiling or limit on the price with the debatable idea that in this way they give the people the security of a fair value and limit the seller to an acceptable rate of return. Distributive justice in two ways!
In situations of sustained inflation, price control aims to freeze the price at which everyone can satisfy their needs. The truth is that when prices rise for whatever reasons, freezing the price at a certain level generates two immediate consequences. The first is an increase in demand for a controlled product. People perceive that the good is cheaper than it may be in the future and they buy to consume or to save and consume later. And there, the one who has better purchasing power and liquidity buys much more than the poor, with limited money. Moreover, the process is accelerated precisely because the consumer knows that the amount of product at that price is limited and acts. Needless to say that this behavior, human and natural, defeats the control objective of bringing the product closer to the "people".
