Price Controls and Communism

Course Outline

Price Controls and Communism

What happens when the prices of all goods are controlled? Under communism, or a command economy, this is exactly what occurs. As a result, all of the effects of price controls become amplified: there are even more shortages or surpluses of goods, lower product quality, longer lines and more search costs, more losses in gains from trade, and more misallocation of resources. As we have seen, universal price controls destroy market coordination and create a system of planned chaos in which it becomes more difficult for consumers to get the goods and services they want and need.


We conclude our discussion of price controls by talking about price controls and communism, or planned economy. This will be brief because the idea is pretty simple. We've already looked at all the effects of price controls in different markets. But we can think about communism as being in some ways a system of universal price controls. Everything is controlled by the government. The price of all goods is controlled by the government. So if a single price control can have bad effects, what happens when you control the prices of all goods? Let's take a look.


Let's just remind ourselves of some of the important effects of price control, both ceilings and floors. Shortages and surpluses, depending upon whether we have the price below the market price or the floor above the market price. Reductions in product quality or sometimes too much quality, too much waste. Wasteful lines and other search costs. Loss in gains from trade, and misallocation of resources.


Now communism, a command economy, can be thought of as a system of universal price controls, price controls on all goods. And we saw exactly these five elements occurring in countries which had universal price controls, such as the Soviet Union. It was common for some goods to be in shortage while other goods had surpluses. Low-quality goods for most, with wasteful quality for other, wasteful lines and other search costs.


During the Soviet Union communist period, it was common for women to spend, on average, two hours of every single day, weekdays and weekends, just lining up to get consumer goods. Clear loss of gains from trade and a misallocation of resources. So it was very common in the Soviet Union to spend lots of resources producing agricultural products, and then not have the trucks to bring those products to market. It was common to be producing radios, have everything you need to produce the radio, except for one single part which was in shortage, so you could not produce the radios.


Remember the situation we described for heating oil in the United States during the 1970s, when in some parts of the country there was plenty of heating oil? There was enough heating oil so that people were heating their swimming pools, while in other parts of the country there wasn't enough and people were shivering in their homes. Those types of misallocation of resources were the norm, were normal, were everyday occurrences in the Soviet Union during its system of communism, or a command economy, or universal price controls. All of these issues came to affect an entire economy.


In short, what communism did really was a substitution of planned chaos, a chaotic economic system, instead of having market coordination. Okay, thanks very much. That will conclude our lectures on price controls.



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