Laissez-Faire on Price Controls
Created | Updated Nov 21, 2003
Laissez Faire Capitalism was a theory founded in the late 1700's by men like Smith, Say, and Bastiat. The Laissez Faire theory of economics holds that any government intervention or regulation of the economy leads to inefficiency, whatever the form of the intervention.
One common, and current example of government intervention in the economy is price controls, which put a "floor" and "ceiling" on prices - or in other words, regulate how and/or how low they can go. Ofcourse, the Laissez Faire theory of economics opposes this intervention, for the following reasons:
When a price goes up, this indicates there is more demanded than there is supplied of a product. When a price goes up, people have an incentive to buy less and be more efficient with their use of a product or service. As an example of this, take NY. Say it was suddenly flooded with immigrants who needed hotel rooms - the price of hotel rooms would go up drastically, creating an incentive to be sparing and efficient with the use of those especially scarce resource(s). When a young couple decide to live in a friend's garage, when a student decides he can live with his parents a little longer, when an elderly pentioner decides she can live in 2 rooms, not four, all these are examples of higher prices creating efficiency in the use of housing. All the housing potentially used by the above examples can now be used by immigrants, giving them a roof over their heads.
When a price goes down, this indicates there is supplied than demanded of a product or service. As an example, take 2 companies, one of them produces cheese, and the other yogurt. If people sudenly decided they wanted yogurt, not cheese, then the price of cheese would fall. Since the sale of cheese is what provides the money to pay for the milk, used in both yoghurt and cheese, when cheese sales and prices drop, the cheese company can no longer buy as much milk, freeing up milk for the yoghurt company.
The fatal flaw of price controls is that they negate the essential role of supply and demand in any economy.
One common, and current example of government intervention in the economy is price controls, which put a "floor" and "ceiling" on prices - or in other words, regulate how and/or how low they can go. Ofcourse, the Laissez Faire theory of economics opposes this intervention, for the following reasons:
When a price goes up, this indicates there is more demanded than there is supplied of a product. When a price goes up, people have an incentive to buy less and be more efficient with their use of a product or service. As an example of this, take NY. Say it was suddenly flooded with immigrants who needed hotel rooms - the price of hotel rooms would go up drastically, creating an incentive to be sparing and efficient with the use of those especially scarce resource(s). When a young couple decide to live in a friend's garage, when a student decides he can live with his parents a little longer, when an elderly pentioner decides she can live in 2 rooms, not four, all these are examples of higher prices creating efficiency in the use of housing. All the housing potentially used by the above examples can now be used by immigrants, giving them a roof over their heads.
When a price goes down, this indicates there is supplied than demanded of a product or service. As an example, take 2 companies, one of them produces cheese, and the other yogurt. If people sudenly decided they wanted yogurt, not cheese, then the price of cheese would fall. Since the sale of cheese is what provides the money to pay for the milk, used in both yoghurt and cheese, when cheese sales and prices drop, the cheese company can no longer buy as much milk, freeing up milk for the yoghurt company.
The fatal flaw of price controls is that they negate the essential role of supply and demand in any economy.
