Price Freeze Policies Will Hurt Consumers

There is no better way to flaunt nonsensical populist policies than in the aftermath of a calamity.

This from today's Inquirer.net

``Profiteering businessmen, beware.

``The Department of Trade and Industry (DTI) has placed a ceiling on all prices of basic commodities in supermarkets and wet markets to prevent unscrupulous business owners from taking advantage of the shortage of basic commodities in the wake of Storm “Ondoy” (international codename: Ketsana).

``During Monday’s emergency meeting of the National Price Coordinating Council, Trade Secretary Peter Favila said that apart from basic necessities, he would ask President Gloria Macapagal-Arroyo to freeze the prices of prime commodities, including batteries and construction materials."

One, the article paints entrepreneurs or business entities as generally "greedy" while governments as equitable. Yeah, right...that's why our government had been ranked as one of the worst in corruption in Asia.

Two, officials believe that they can subvert the natural laws of economics and allocate resources better than the marketplace.

They refuse to admit that governments are the least effective way to direct resources to its optimal use. They should learn from Cuba's failed collective agricultural policies.

Price controls or "anti price gouging regulations" in contrast to popular wisdom worsens, and does not enhance, society's predicament.

How?

One, these regulations are likely to serve as disincentive for producers or providers of goods and services to sell. Probably, they would rather hoard the stuff.

Two, it prevents pricing signals to spur production or supply to respond to changes in demand.

Three, below market prices induces significant increases in demand.

As Henry Hazlitt explains in Economics in One Lesson,

``Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.

``If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But this is precisely the opposite of what the government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply."

Fourth, black markets are likely to emerge out of the shortages.

Fifth, more regulations will breed more corruption. Some officials will probably keep a blind eye on entities selling at "high" prices but with a "take".

Lastly, restrictions in the marketplace will even lead to further restrictions, distortions and shortages in the economy.

Again from Henry Hazlitt, ``Some of these consequences in time become apparent to the regulators, who then adopt various other devices and controls in an attempt to avert them. Among these devices are rationing, cost-control, subsidies, and universal price-fixing."

For a professional academic economist serving as President of the country, who we presume is aware of these risks, the obvious knee jerk regulatory response reflects not for the economic wellbeing of its constituents, but as political advertisement for the coming elections.