‘Fairness for Me but Not for Thee’ Is No Way to Regulate Prices

Soothsaying about the prospects of the macroeconomy is always in high demand. Highlighting the virtues of a market price mechanism in allocating goods and services during emergencies? Nobody wants to hear about that.

Transport secretary Grant Shapps suggested this week a state-run “forecourt watch” was needed to name and shame companies that failed to set petrol prices at levels the government deems appropriate.

When Covid struck, public anger saw the Competition & Markets Authority investigate businesses charging “unfair” prices for hand sanitiser. To appease the fury, the watchdog even wanted the power to implement US-style “anti-price gouging” regulations.

Such laws, which we do not have in the UK yet, impose heavy fines on firms “charging unconscionably excessive prices” during emergencies, unless the businesses can prove that their production costs have increased commensurately. The idea is to deter “unreasonable” price rises that fatten profit margins during a crisis.

At heart, these sorts of regulations simply deny that rising demand could be a legitimate reason for higher prices at all.

We are already hearing the drumbeat about how retailers might exploit the coming food price crunch, with news outlets asking if they are “profiteering” from milk price increases. Even if this ultimately doesn’t result in formal legislation, the petrol machinations suggest political pressure will be applied to food sellers to keep prices lower, irrespective of the economic conditions that supermarkets face.

A war on the price mechanism could be highly damaging. As economist Tyler Cowen says, price movements play a crucial economic role as “a signal wrapped in an incentive”. Supermarkets and petrol stations are constrained in what they can charge by consumers’ willingness to pay, or rivals’ abilities to undercut them. Sharp price rises therefore signal that, because of a demand surge or an adverse supply shock, the goods in question became relatively scarcer at the former price, with demand outstripping supply.

Though it’s regrettable when things become less affordable, price rises ensure that goods and services are allocated efficiently given this reality. Rising prices stop consumers from over-purchasing, allowing those with a higher willingness to pay to continue to find goods. For suppliers, the higher price makes introducing products to the market relatively more profitable, compensating businesses for expanding capacity, paying workers’ overtime, or drawing down inventory to fulfil orders.

The combined effects of the price hike on consumers and suppliers, therefore, helps prevent prolonged shortages. The alternative, where political pressure or legislation forces the price messenger to tell a comforting lie about a product’s availability, results in queues, within-store rationing and a black market. We saw this with the long forecourt lines exacerbated by political pressure last year, or the empty shelves and insane online bidding for facemasks in 2020.

Economists recognise that using quasi-price controls is inefficient social policy. If you don’t ration by price, there’s no reason to presume the resultant queues or quantity restrictions will produce better results for the poor or those in need. Since petrol and food are also essential inputs to many other sectors, arbitrary shortages that block the purchase of goods by consumers who desperately need them risks producing bigger problems downstream.

Nobody argued it was unfair to businesses when consumers enjoyed cheaper flights, sports merchandise and hotels as demand crashed early in the pandemic. After prices rise, however, we slam businesses for responding to the very same forces in the opposite direction. So long as consumers demand “fairness for me but not for thee”, the risk of heavier-handed price controls remains. Ignoring economists’ warnings on the role of prices, though, would risk extended shortages and dysfunction.