Price Controls Are Just Another Policy Lever

you can do them in dumb ways or smart ways but honestly they're just a thing that governments can do to generate outcomes that they might want

Price controls had a brief return to the public agenda after Kamala Harris proposed a ‘ban on price gouging’ by supermarkets and food suppliers, although it unsurprisingly turned out that she wasn’t thinking about imposing price controls on food. The brief period of confusion provoked the usual response from those Very Serious People who think that price controls are the devil incarnate. This, of course, generates the opposite response from those who define themselves in opposition to the Very Serious consensus.

I do not have very strong opinions on price controls per se. I think there are instances of price controls that work well and make us better off. In other cases, price controls can be a net positive (with some noteworthy downsides) if they are implemented judiciously and with the correct auxiliary policies. There are also many cases where price controls seem like a bad idea. Asking a question like “Are price controls good or bad?” is like asking whether prescribing corticosteroids is good or bad. The answer is that it depends. Does a patient need them? Are you prescribing the right dosage? Monitoring via blood tests? Do you have a plan to taper off or gradually move to a better drug? And so on.

Price Controls Are A Compromise

Price controls are not usually applied to sectors that work well on their own. You don’t usually hear anyone advocating for price controls on socks and underwear. If everyone had a decent home that they could stay in for a reasonable price and for as long as they wanted, then no one would be advocating for rent control. There is no need for price controls when the market (or some non-market means of allocating resources) works well enough for everyone.

Imposing price controls on perfectly competitive markets where consumers are able to exercise their willingness to pay would be a horrible idea. But actually existing markets are not perfectly competitive and consumers willingness to pay does not perfectly correlate with their ability to pay. That doesn’t mean we can dismiss all 'Econ101’ objections to price controls – “Markets don’t fit the idealised models of Econ101, therefore we can ignore all economic theory and do whatever we want” is specious reasoning. The cure can still be worse than the disease.

More importantly, price controls do not resolve these issues. They don’t ensure perfect competition. They aren’t what economists call a first-best policy. Price controls distort price signals and come with observable negative consequences. They’re the kind of policy that you implement when you can’t fix the broader problem.

All of this is to say that price controls are always a compromise. They aren’t ideal, they involve real trade offs and you can’t just recklessly apply them hoping that they’ll fix everything.

Rent Controls Help and Hurt Exactly Who They’re Supposed To

Unlearning Economics made a video a few years ago arguing that the hegemonic anti-rent control view among mainstream economists and in Econ101 textbooks is analogous to the outdated, but similarly hegemonic (until recently) anti-minimum wage position. I don’t entirely agree with this, but it does seem to be the case that some commentators like to copy their old anti-minimum wage spiel and misapply it to the topic of rent control. The anti-minimum wage view played an important pedagogical role in Econ101 and Politics101 classes by providing a legitimate (but empirically false) example of a well-intended policy that hurts the people it’s supposed to help. If minimum wage laws are intended to raise wages for the poorest workers but actually result in the poorest workers losing their jobs via a reduction in the demand for labour, then the minimum wage actually makes things worse. The same argument is often made about rent control. If rent controls are intended to lower rents for the poor but end up leaving them without a place to rent via a reduction in the supply of rental units, then rent controls hurt the people they’re designed to help.

I disagree that rent control is a policy designed to lower rents wholesale or for the all of the poor. Rent control advocates might like to present it as a panacea for rent affordability, but it isn’t. What rent control does is improve rent affordability for existing tenants (provided that their landlord doesn’t or can’t withdraw from the rental market - you have to get the auxiliary policies right) and in some cases to additionally encourage landlords to sell to owner-occupiers. It typically benefits existing renters at the expense of potential future renters, regardless of income. Existing renters get a sweet deal in the form of a rent controlled home and potential future renters are going to struggle to find an unoccupied rent controlled home or have to pay for an unregulated home. Basically, rent control lowers tenant mobility in such a way that it protects existing tenants from being forced to move via rent increases but makes housing more expensive for potential tenants. As Daniel Herriges points out, “Rent control should always be understood as an anti-displacement policy, not an affordability policy.”

Is this a good thing or a bad thing? It depends. It sounds like a good thing that rent control might prevent a grandmother from being priced out of the neighbourhood she spent her whole life in. But it’s not ideal that this comes at the expense of people who could be moving to that neighbourhood for work or school. We probably don’t want cities where people live really far away from work because they have a sweet deal on a rent-controlled unit or because they can’t move to the rent-controlled region.

Weaker forms of rent control obviously have less of a positive and negative impact. Certain auxiliary policies, e.g. tenant protections, long phase-in dates for new builds, vacancy decontrol etc. can also mitigate the downsides of rent control. Personally I’m in favour of a modest, judiciously applied form of rent control as a second-best policy before the Anglosphere can maintain the kind of public housing abundance that Singapore has achieved.

Good Price Controls Are Still Price Controls

Rent control is pretty controversial, but some price controls are borderline common sensical. Price controls on utilities are ubiquitous, as are minimum wage laws, and in addition price controls on pharmaceutical drugs are the norm in most developed nations. Many countries have concluded that market prices for prescription medicines are too high and so they impose some form of price controls on pharmaceutical drugs. The way this usually works in Australia is pharmaceutical companies apply to have their drug listed on the Pharmaceutical Benefits Scheme (PBS), which subsidises the cost of approved medicines to make them affordable for citizens. If the drug receives a positive recommendation from the Pharmaceutical Benefits Advisory Committee then they need to negotiate with the government on the price. In doing so the pharmaceutical company needs to provide cost information data (e.g. accurate information about the costs involved in manufacturing the drug). If a price is agreed to then it goes to the Health Minister for approval. Then the government subsidises the drug to a significant extent so that citizens and permanent residents can purchase them at a low price. ¹

Advocates of such arrangements don’t like to call them price controls. Instead they call them ‘price negotiation’. The thought is that it’s perfectly normal for an actor (the state) buying and subsidising a product, especially when that actor is the state, to haggle on the price. It does not sound like the same kind of thing as, say, mandating that supermarkets can’t sell oranges to anyone above a certain price. If the pharmaceutical companies and the government can’t come to an agreement, then the pharmaceutical company is free to sell their drug in the private market or refuse to sell it in Australia altogether. But in all honesty, the same applies to other price controls. If someone doesn’t want to comply with a price control, e.g. they can’t agree with the government on the price, then they are free to sell their product somewhere else or in some other way that complies with the law.

Price negotiation for pharmaceutical drugs remains a second-best policy. They address the issue that there isn’t really a genuine market in pharmaceutical drugs because patients just buy whatever they’ve been prescribed. They don’t, however, directly resolve the issue of intellectual property giving drug companies a legal monopoly. They just evade it by getting the government to exercise monopsony power.² There are also genuine trade offs involved that need to be addressed with auxiliary policies, like reduced profits leading to less private research and development.

Liberals are usually happy to label instances of price negotiation that they don’t like as price controls. Sweden’s rent control system operates via collective bargaining, in much the same way that Swedish wages are determined. One’s rent is determined through negotiations between the landlord and the tenant’s union. If we can call these price controls, then surely pharmaceutical drug price negotiation is an instance of price controls too.

I also occasionally see claims to the effect that weak price controls, which tend to be popular and have minimal adverse effects, are not actually price controls at all. The Australian Capital Territory has a form of rent control where landlords need to seek approval to raise their existing tenant’s rent by greater than 10% of the growth in rents across the territory. This policy doesn’t necessarily do anything to limit rent increases in general, as it simply restricts individual landlords from proposing rent rises significantly higher than what other local landlords are proposing. This is a policy supported by the local branch of Australian Labor Party, which in other states/territories and at a federal level is not too keen on the idea of rent control, and so you occasionally hear Labor-aligned people insist on euphemistically calling this ‘rent stabilisation’ or ‘anti-rent gouging’ instead of rent control.

Price Controls Are Just a Thing That Governments Can Do

Price controls are not, on their own, a terrible idea or an amazing idea. Price controls are just a thing that governments can do to generate outcomes that they might want. Sometimes they’re good, sometimes they’re bad and sometimes it can be hard to tell whether they’re good or bad. They have smart use cases and dumb use cases. They can be implemented judiciously or recklessly. There’s no reason to demonise or valorise them.

1. Up to $31.60 for the general public and up to $7.70 for people with concession cards.

2. ‘Monopsony’ just means a monopoly for buyers.