Right or Wrong: Price Controls

Price increases in periods of emergency are usually dismissed as “gouging”, and

states tend to deploy institutional resources against them. The common institutional
response is to implement price controls, which usually establishes a “ceiling” on the
maximum price certain products can reach during a crisis. Currently, as the COVID-19 has
spread around the world, both Venezuela and the United States have implemented this
kind of controls to regulate such increases. 

In the case of the United States, the regulation changes depending on the region,
but in general, the laws stipulate a maximum price or percentage increase if the
Government declares a State of emergency. On the contrary, Venezuela has a long
history of price controls since 1939, whether the country was in a state of emergency or
not. Currently, the Venezuelan Government has decided to double down on its price
controls regulations during the quarantine, as it accuses the private sector of taking
advantage of the situation and committing price gouging1. 

Such controls have ethical, political, and economic implications. There is no “one
fits all” solution, the right course of action will depend on the conditions of each country.
Nonetheless, is important to consider both the positive and negative effects caused by
such controls. 

Negative effects of price controls.

Prices allow decentralized coordination between economic agents that make

voluntary exchanges and react to price changes, with information quality enhanced or
impaired by state action. Such inertia is present even at times when shocks are extreme
and involve sudden changes in the actions of economic agents, such as the COVID-19
pandemic and the economic impact of both the spread of the virus and the response of
governments to contain it. Although in each individual case the dimensions of the changes
will depend on supply and demand elasticities, in general the benefit caused by these
price changes can be summarized as follows: 

 Savings and self-rationing by buyers in relation to goods the prices of which are
increasing. Even when their preferences for such goods increase, the quantities
that the buyers actually end up acquiring will be less than those they would
consume if prices were not adjusted.
 Increases the supply of goods which prices have risen as suppliers see
profitable opportunities to meet new demand. This is in fact what allows prices to
stabilize or even fall as supply channels are restored. Of course, this is conditional
on logistical responsiveness (elasticity), and some goods may experience longer
lags than others. 
 Search for substitute goods to cover unsatisfied needs, both by buyers who face
barriers to access particular items; and by suppliers who try to adjust to new
market conditions defined by reduced mobility.

1
To further comparison through history of price controls in these two countries see Annex 1 at the end of the
document.
 For example, if price rises are outlawed then there is no financial incentive for
people to direct their selling efforts to the disaster zone. For instance, if generators are
selling for four times their normal price, that provides enormous incentives to get them into
the disaster zone quickly; if they are selling at the same pre-disaster price, then there is no
such incentive. In this case, the Government is suppressing the price mechanism and its
ability to distribute information, causing that necessities of consumers and suppliers
remain unfulfilled.  

Positive effects of price controls.

When considering the positive effects of price controls, we need to take in

consideration the ethical implications and specific cases in which the benefits generated
from the price mechanism are not certain. First, price controls allow the government to
stop companies from taking advantage of the situation through price gouging, which harms
the consumers that are more vulnerable to the crisis, worsening inequality. 

On the other hand, the supply of goods will not always increase in response to
higher prices, as the capacity to increase production varies greatly in each market (is
easier to increase the production of food that the production of masks and gloves), this is
known as the supply elasticity. This is the case in the current COVID-19 pandemic, where
the demand of masks has been increasing daily. Currently, there are very few producers of
this product and, although several sectors have started to make cloth masks, the demand
is not being met, so governments are looking for ways to ration masks only for hospitals.
This example helps us conclude that a solution is to not let the markets flow freely in
situations as critical as COVID-19, since some market mechanisms are not able to
respond and supply the needs of consumers during the crisis. Prices will continue to grow
rapidly, and with a limited supply, only affecting negatively the consumer. 

In this case, an ethical option is to apply price controls to protect consumers, allow
them to acquire, in a limited way and in small quantities, the product without affecting their
well-being. While also making sure that producers can cover their costs, minimizing all
kind of losses.

What options do we have?

Lamont & Favor, 2009 note that ethical considerations in selecting methods of
distributing goods during disasters usually focus on answering the question “what is the
fairest way to distribute scarce goods to consumers,” ignoring the questions of “what
distribution system ensures that goods arrive as quickly as possible to reduce suffering in
disaster areas” and “what distribution system fairly rewards providers of goods in disaster
areas.” The authors identify that, to answer the first question, the spectrum of options and
distribution mechanisms covers a range summarized in the following systems: 

 Auction (free market) where prices are set by supply and demand and the
acquisition of goods is dependent on purchasing capacity. With efficiency gains
and incentives for future provision, but with the risk of excluding the poorest. This
system is considered to be a morally unsatisfactory system for distributing other
essential goods and services. When it comes to basic human needs, people’s
relative needs rather than their ability to pay should determine the distribution.
  Price controls or Zero Price Rise (ZPR) where goods are offered at their pre-crisis
prices. Prices are nominally more accessible, but access may depend on first
come, first served or connections with distributors, so poor people with limited
mobile access may remain excluded. Additionally, given the limited supply, the cost
of distribution shifts from money to time. 

 Triage (targeted rationing) where goods are deliberately directed to people

according to their urgent needs. This is usually applied in practice by medical
personnel and social workers for cases of people in critical situations. It’s
preferable in specific cases, but with difficulties in scaling it up to cover many more
goods duen and ZPR systems. The auction system is the free market ideal.

There is a high degree of variability in the configuration of each of these methods,

and the decision on the most appropriate one will be conditioned by the different types of
assets, initial supply, population needs, and the dynamic iterations of the disaster.

Differences on the Venezuelan and Unites States cases

Although Venezuela and The United States have similar regulations, they cannot
be compared because the US has a stronger institutional framework which allows them to
have wider set of options to respond to crisis like COVID-19, as targeted rationing and
price controls. Despite price controls is not a perfect solution for The United States, it can
work with the right measures and adjustments. Nonetheless, rationing can be preferred for
those goods which are scarcer due to low supply elasticity, as long as the Government has
the sufficient information to distribute the goods correctly.

On the contrary, the Venezuelan Government lacks the appropriate institutional

framework to respond to this pandemic, which alongside the collapse of the economy
limits greatly the set of tools at its disposal. Inclusive, with the recent decrease of oil prices
- the main income of Venezuela - the Government doesn’t have enough resources to
combat the crisis. In this case, establishing price controls will worsen the situation, as the
Government lacks the information and tools to establish the right set of parameters for the
regulation. Similarly, the Venezuelan Government does not have the capacity to establish
a targeted rationing system like the US. Therefore, when we discuss the options that
Venezuela has to respond to the crisis, our recommendation is to not implement any of
this measures, as interventions are what has harmed the Venezuelan economic, political
and social structure in the first place. 

There is no right answer when discussing this topic, as there is always a trade-off
between ethics and economics. But using the correct set of responses in each individual
case, Governments can stop companies from taking advantage of consumers through
price gouging, especially during a crisis like the COVID-19 pandemic, always considering
their resources and institutional framework. Not all countries are the same and have the
same needs, so the possible solutions belong to a grey zone between what is right and
what is wrong.
 Group D:
Adriana Láncara
Alessandra Carro
Diego Santana 
Shaun LoVerdi
Raeanne Over
Anam Hussain
Satang Trawally

Bibliography

Davis, M. L. (2017, November 6). Price Gouging Is Fine but Humans Are Better. Retrieved
from The Library of Economics and Liberty:
https://www.econlib.org/library/Columns/y2017/Davisgouging.html
Lamont, J., & Favor, C. (2009). Price Gouging in Disaster Zones: An Ethical Framework.
Social Alternatives, 49-54. Retrieved from
http://citeseerx.ist.psu.edu/viewdoc/download?
doi=10.1.1.458.3350&rep=rep1&type=pdf#page=49
Munger, M. (2007, January 8). They Clapped: Can Price-Gouging Laws Prohibit Scarcity?
Retrieved from The Library of Economics and Liberty:
https://www.econlib.org/library/Columns/y2007/Mungergouging.html
Munger, M. (2020, April 3). When "Price Gouging" Is Good: Michael Munger. The Reason
Interview with Nick Gillespie. https://podcasts.apple.com/us/podcast/the-reason-
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 Annex

Annex 1: Electronic
Payments Coalition . (2017, April 28). INFOGRAPHIC: A HISTORY OF
FAILED PRICE CONTROLS. Retrieved from Electronic Payments Coalition :
http://www.electronicpaymentscoalition.org/resource/infographic-a-history-of-failed-price-
controls/