excerpts from BASIC  ECONOMICS: A Citizen's Guide to the Economy
by Thomas Sowell

Chapter 3, "Price Controls"

     To understand the effects of price control, it is necessary to understand how prices rise and fall in a free market.  There is nothing esoteric about it, but it is important to be very clear about what happens.  Prices rise because the amount demanded exceeds the amount supplied at existing prices.  Prices fall because the amount supplied exceeds the amount demanded at existing prices.  The first case is called a "shortage" and the second is called a "surplus"--but both depend on existing prices

     Simple as this might seem, it is often misunderstood--sometimes with disastrous consequences.  A closer examination shows why shortages persist when the government sets a maximum price lower than what it would be in a free market and why a surplus persists when the government sets minimum prices for farm products higher than these prices would be in a free market.


     When there is a "shortage" of a product, there is not necessarily any less of it, either absolutely or relative to the number of consumers.  During and immediately after the Second World War, for example, there was a very serious housing shortage in the United States, even though the population and the housing supply had both increased about 10 percent from their prewar levels and there was no shortage when the war began. 

     In other words, even though the ratio between housing and people had not changed, nevertheless many Americans looking for an apartment during this period had to spend weeks or months in an often vain search for a place to live, or else resorted to bribes to get landlords to move them to the top of waiting lists.  Meanwhile, they doubled up with relatives, slept in garages or used other makeshift living arrangements.

     Although there was no less housing space per person than before, the shortage was very real at existing prices, which were kept artificially lower than they would have been because of rent control laws that had been passed during the war.  At these artificially low prices, more people had a demand for more housing space than before rent control laws were enacted.  This is a practical consequence of the simple economic principle already noted in Chapter 2 that the quantity demanded varies with how high or low the price is.

     Some people who would normally not be renting their own apartments, such as young adults still living with their parents or some single or widowed elderly people living with relatives, were enabled by the artificially low prices created by rent control to move out and into their own apartments.  These artificially low prices also caused others to seek larger apartments than they would ordinarily be living in.  More tenants seeking both more apartments and larger apartments created a shortage, not any greater physical scarcity of housing relative to the population.  When rent control laws expired or were repealed, the housing shortage likewise quickly disappeared.

     As rents rose in a free market, some childless couples living in four-bedroom apartments decided that they could live in two-bedroom apartments.  Some late teenagers decided that they could continue living with mom and dad a little longer, until their pay rose enough for them to afford their own apartments, now that apartments were no longer artificially cheap.  The net result was that families looking for a place to stay found more places available, now that rent-control laws were no longer keeping such places occupied by people with less urgent requirements. 

     None of this was peculiar to the United States.  The same economic principles can be seen in operation around the world and down through history.

-- excerpted from Chapter 3 of BASIC ECONOMICS: A Citizen's Guide to the Economy by Thomas Sowell
-------> Also see: "An ancient fallacy" HERE
       and "Perennial economic fallacies" HERE.
and more fallacies HERE.  
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"As an economist, whenever I hear the word 'shortage' I wait for 
the other shoe to drop. That other shoe is usually 'price control.' 
So it was no great surprise to discover, after the electric power 
shortage in California made headlines, that there were price 
controls holding down the price of electricity to the consumers."
-- Dr. Thomas Sowell

"People with a basic knowledge of economics would understand 
that words like 'surplus' and 'shortage' imply another word that 
may not be mentioned explicitly: Price. And chronic surpluses or 
chronic shortages imply price controls." -- Dr. Thomas Sowell

"One of the most important reasons for studying history is that 
virtually every stupid idea that is in vogue today has been tried 
before and proved disastrous before, time and again."
-- Dr. Thomas Sowell

"When Western countries in the past were as poor as Third World
countries are today, these Western countries nevertheless had one 
big advantage: There was no large and influential class of the 
intelligentsia to impede their progress with unsubstantiated 
theories and counterproductive propaganda." -- Dr. Thomas Sowell

"Ultimately it is only wealth that can reduce poverty." -- Dr. Thomas Sowell

"When you can't get enough money out of the taxpayers, then the 
political formula is to confiscate private money by the back door, 
by imposing price controls on businesses. Media pundits seem utterly 
uninterested in the actual economic consequences of price controls, 
even though the history of such consequences goes back for centuries 
in countries around the world.  Those consequences have repeatedly 
included shortages and quality deterioration -- which can be matters >
of life and death when it comes to medical care. But who has time to look 
up facts when there are exciting political strategies to chatter about?"
-- Dr. Thomas Sowell

"One of [Reagan's] first acts as President was to end price controls on
petroleum. The New York Times condescendingly dismissed Reagan's 
reliance on the free market and repeated widespread predictions of 
'declining domestic oil production' and skyrocketing gasoline prices. 
Within four months the price of gasoline fell by more than 60 cents 
a gallon." -- Dr. Thomas Sowell

"Asking liberals where wages and prices come from is like asking 
six-year-olds where babies come from." -- Dr. Thomas Sowell

"Think about it: What the busybodies are saying is that third parties 
like themselves -- who are paying nothing to anybody -- should be 
determining how much somebody else should be paying those 
who work for them." -- Thomas Sowell

"People who are very aware that they have more knowledge than the 
average person are often very unaware that they do not have one-tenth 
of the knowledge of all of the average persons put together. In this 
situation, for the intelligentsia to impose their notions on ordinary people
is essentially to impose ignorance on knowledge." -- Dr. Thomas Sowell


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