Thursday, 16 September 2010

The effects of price controls

In light of Eric Crampton's, of Offsetting Behaviour fame, excellent piece on "Price Gouging" in this morning's Press here in Christchurch, there was much discussion over lunch on the effect of price controls. Seamus Hogan, also of Offsetting Behaviour, gave the following wonderful example:
A classic example of price controls making a bad situation much worse occured in 1584-85, when Spanish forces under the Duke of Parma besieged the port city of Antwerp on land and gradually blockaded it from the sea as well. As food became scarce, the city fathers imposed price controls. While food was plentiful elsewhere, and merchants could have delivered vast quantities of supplies before the Spanish tightened their blockade, relief never came. The reason:

Antwerp's price controls meant that merchants would get only the same price for their goods in Antwerp as they would get for selling them elsewhere at a much lower cost and risk. Naturally, the merchants sold elsewhere. At the same time, the artificially low prices set by the city government discouraged the citizens from limiting their consumption of scarce foodstuffs. The result: The population continued to eat heartily as if there was no shortage until the food ran out and they were forced to surrender. In the words of one historian, "the city, by its own stupidity, blockaded itself, far more effectively than the Duke of Parma could have done." Schuettinger and Butler, op. cit., pp. 33.

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