Saturday, November 19, 2005

Excellent essay on prices by Thomas Sowell

An excerpt:

Prices are perhaps the most misunderstood thing in economics. Whenever
prices are "too high" -- whether these are prices of medicines or of
gasoline or all sorts of other things -- many people think the answer is for
the government to force those prices down.

It so happens there is a history of price controls and their consequences
in countries around the world, going back literally thousands of years. But most
people who advocate price controls are as unaware of, and uninterested in, that
history as I was in the law of gravity.

Prices are not just arbitrary numbers plucked out of the air or numbers
dependent on whether sellers are "greedy" or not. In the competition of the
marketplace, prices are signals that convey underlying realities about relative
scarcities and relative costs of production.

Those underlying realities are not changed in the slightest by price
controls. You might as well try to deal with someone's fever by putting the
thermometer in cold water to lower the reading.

Municipal transit used to be privately owned in many
cities, until local politicians' control of fares kept those fares too low
to buy and maintain buses and trolleys, and replace them as they wore out.
The costs of doing these things were not reduced in the slightest by
refusing to let the fares cover those costs.

All that happened was that municipal transit services deteriorated and
taxpayers ended up paying through the nose as city governments took over from
transit companies that they had driven out of business -- and government usually
did a worse job

The rest of the essay is here.


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