Home > Economics > Relative Price Changes are a Good Thing. Price Controls are Not

Relative Price Changes are a Good Thing. Price Controls are Not

The competition for “worst public policy idea of the year” is heating up.  Osborne’s entry, “Help to Buy”, was striking both for its wrong-headed selection of market (housing, which is suffering exactly because of government intervention), and magnitude (twelve-figure sums of public sector guarantees).  But Miliband’s entries this week are strong contenders; price controls and property confiscation.

Osborne’s “Help to Buy” and Miliband’s price controls are similar, and similarly bad policy, in that they implicitly reject the signals embedded in market price movements.  Osborne thinks house prices are “high” and decides that people need “Help to Buy”, a demand-side subsidy.  Miliband thinks energy prices are “high” and decides that is not “fair” for consumers (he used the phrase “fair deal” in his speech), so we need a supply-side restriction (albeit temporary) in the form of price controls.

In neither case is it possible to believe that policy is being driven by any objective analysis of the markets in question; they are both clearly populist attempts to win votes.  This seems like a worrying trend.  Price movements are part and parcel of how market economies allocate resources; relative price changes are signals to and from consumers and producers about supply and demand.  In rejecting that most basic principle politicians reject one of the most fundamental sources of our prosperity.

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Categories: Economics
  1. September 25, 2013 at 13:16

    I’m no defender of Help to Buy, and I agree that the mistake is in thinking that the market is pricing wrongly in either case, and I agree that the better solution is to act on the supply constraints (land-use planning for housing, renewables and market structure for energy).

    But, let’s enter Osborne-Miliband world, and assume prices are “too high” and that the supply constraints are immovable. Surely an intervention by subsidy allows relative prices to adjust according to the impact of the subsidy – you’re hoping to move the market to lower prices, not dictate to it. By comparison, a price control simply bypasses supply and demand altogether, completely disrupting relative price relationships. Generally speaking, the subsidy seems likely to be less worse than the price control. (Also, as a political economy matter, the costs of government decisions are picked up by taxpayers in the subsidy case, rather than being arbitrarily assigned to particular private parties in the price control case.)

    • September 25, 2013 at 13:21

      I agree with all that, Duncan.

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