For the less familiar, price controls seem like a good idea. However, as Don Boudreaux explained in an essay published by the American Institute for Economic Research, price controls come at a cost.
In his essay, Boudreaux said no government intervention into a market economy is more certain to do damage as price controls. Market prices make possible the successful, productive coordination of the efforts of countless specialized workers and firms around the world, and they coordinate the resulting massive flows of economic outputs with the demands of the consumers.
"Every government-imposed control on prices reduces the effectiveness of this coordination," he wrote.
For example: While people have praised Sweden's rent controls, economist James Murphy explained that their actual impacts are not as great as advertised and that they have, in fact, created a mess in Sweden's rental market.
Sweden's rent control is widely touted by many as a model for how the property market should work. Young people in Ireland, for instance, like to point to Sweden as a nirvana where rent control ensures the availability of affordable and high-quality rental stock.
However, rent-controlled apartment contracts have become valuable assets that are exploited by many. Tenants who hold the coveted rent-controlled primary contracts sublet properties to secondary tenants on the black market at rates that are double the rent-controlled amount.
Once renters obtain primary contracts, they rarely relinquish them, with only half a percent of primary rental contracts in central Stockholm finding their way back to the housing agency – making it nearly impossible for any newcomers to the city to get one of the contracts.
Those who are keen to jump the queue revert to a range of methods, from leveraging personal networks to paying bribes that could amount to several years' rent. (Related: Housing bubble about to burst? Mortgage applications crash to 22-year low as monthly payments skyrocket.)
Boudreaux: Price control is a harmful government intervention
This shows that one class of people can gain an advantage over others, and this is not exactly a recipe for social harmony.
A price ceiling, which is usually set below the established market rate, could produce a shortage of goods and services or create a drop in the quality of the said goods or services provided.
A price floor, which is set above the rate the market would establish, could also produce an oversupply of the said goods or services. This is similar to the European Union's Common Agricultural Policy, which led to the fabled butter mountains and wine lakes.
Even economists with social leanings understand the negative but necessary consequences of rent controls, which can destroy urban areas.
While the public often supports price ceilings, Boudreaux said this support would surely disappear once the public understands the basic economics of what he calls a harmful government intervention.
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