Calls for price controls are economically illiterate

Recently there have been calls for the government to impose maximum prices on everyday goods. These are motivated by the belief that, during this crisis, shops and producers have been exploiting customers by raising the prices of essential items.

Figures from the Office of National Statistics show that this is plain wrong. From the middle to the end of March, prices of dried pasta, kitchen rolls, tinned soup and long-life milk actually fell 1%. Baby food and antibacterial wipes fell nearly three times that.

Yes, there were tiny increases in the price of handwash, toilet roles and cleaning products. And cough medicine is certainly up in price. But the general picture is that most retailers have not actually sought to exploit anyone.

But then, if they want to have any customers left after the crisis is over, that seems to me to be a perfectly sensible strategy.

More generally, though, the calls for the government to cap prices are economically illiterate. When things are in short supply and heavy demand, their prices do indeed edge up. But that induces producers to supply more, and prompts consumers to use things more sparingly, or find alternatives. Which is exactly what you want to happen.

If you put price caps on scarce, you just make them even scarcer. If you thought the shelves were bare after all the panic buying, just wait until you see the effect of price controls.

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