Government price caps, Good, Bad, or Ugly - 20100816

[John]

Inspired by the following thread from facebook.

Paul Ferrante I love it how the same liberals who wanted to force the
evil health insurance companies to cover all "pre-existing" conditions
are now bitching because their premiums are rising. Do they not put
one and one together? It is simple: Costs go up, premiums go up...Econ
101. Even "stupid" Bush and "idiot" Palin could figure this out.
8 hours ago · Comment · LikeUnlike

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Tom Martin and Brian Benito like this.
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Brian Benito Obama's premium definitely should go up for
pre-exisiting condition of "dumbazzfckitis"
8 hours ago · LikeUnlike
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Ryan Renner Maybe not palin
8 hours ago · LikeUnlike
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Barry Day
Implement my plan, Paul. Force every Republican to work in
a soup kitchen for 3 months, and at the same time force every Democrat
to take a college-level economics course.

Can you believe I was talking to a self-proclaimed Liberal
the other... day, who pretty much hates anything that is even remotely
associated with Republican ideas (including Libertarian economic
theories, since apparently they're the same thing to her) and she
actually had the stones to tell me that she find economics to be
completely boring and she has no interest in learning about it? This,
my friend, is what the knee-jerk Left is composed of.

It's like how the state of Hawaii (a strong "Blue state")
decided a few years ago when gas prices were readjusting, that they
were going to implement a price cap on gasoline. Hello, 1970's?
Morons. Just like the retarded Californians blamed the deregulation of
the power industry for their rolling blackouts, when the state still
implemented price caps on electricity rates as well. High Demand + Low
Profitability = Lowered Supply = Not in Equilibrium

From now on, I refuse to have an economic discussion with
any Democrat, Liberal, or Socialist until they can prove to me the
understand basic economic theory!See More
7 hours ago · LikeUnlike

Paul Ferrante
Seth, exactly! He inherited a mess from moron Bush and
evil Cheney. It is not Obama's fault.; it will NEVER be Obama's fault.
If only Bush hadn't stolen Florida Obama would not be forced to raise
taxes, ratchet up the war in Afghanistan,... keep Guantanamo open,
break virtually all the other campaign promises, and implement this
monstrosity of a healthcare plan.

Barry, you are so stupid. The shortfall from the shortage
can be made up by taxing the rich who do not pay their "fair share".
If only you could see the brilliance...you should have gone to UPenn
with me then your head would be on straight! The brilliant Ivy League
professors have it all figured out.See More
5 hours ago · LikeUnlike
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John Von Achen
Barry, just not 100% on your equation.
If there is a low profitability supply will not go down
unless there is an expectation that the supply will have a greater
value in a different time or place. Business still have fixed costs to
cover.... In order to cover those costs they may choose to either
lower those costs: layoff workers, streamline their business. Or, they
may need to increase production to retain profit. You also need to
consider the value of market share and customer retention.
If you intended to look at the issue from OPEC, now you
have more politics at hand than business.
I'm not saying I agree with Hawaii. I'm just saying that
its more complicated and your argument has holes. I'm glad you passed
Econ 101, when your ready for the advanced class let me know.See More
4 hours ago · LikeUnlike ·
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Barry Day
Nice try John. But clearly you don't understand the
concept of investment. It's 100% correct that lowered profitability =
lowered supply. When people aren't making a certain profit margin,
they either divest those assets and enter a more... profitable market,
or they close down.

The problem with the idiots from California is that with
price caps, there was little incentive to conserve energy. Electricity
suppliers aren't getting good returns on their investments, so there's
no incentive to supply the electricity that hasn't curbed in demand
because the price doesn't discourage consumers from being wasteful.

But thanks John, I'm glad to hear that my graduate-level
education makes me half as knowledgeable as you. Paul, how do you
think Gary Bolton and Keith Crocker would respond?See More
3 hours ago · LikeUnlike
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Paul Ferrante
John, all of those factors play a role in price. However,
labor is not a fixed cost; it is a variable cost. Price caps never
work and always result in a shortage from an inefficient qualtity
supplied. This is true because there is a loss... of revenue
associated from artifically lowering the market price called dead
weight loss. Thus, increasing capacity will only increase the shortage
and revenue loss.

OPEC is a cartel and was a good example of what happens
when collusion occurs. These nations used to get together and agree on
a price and produce oil to match that price and were even able to
artifically create shortages for political purposes (1973 for
example). However, today there are large non-OPEC nations and are
world market places to buy/sell oil (NYMEX for example) so OPEC power
to set the oil price is limited. To demonstrate, during the oil spike
of 2008, OPEC nations were at record production capacity.See More
2 hours ago · LikeUnlike
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Barry Day
Regardless of the source of the loss of supply, Paul,
price caps prevent the ability for price to drive down demand.

The supply/demand curve is a perfect equilibrium. Just
like the Invisible Hand drives the free market perfectly. That's
th...e beautiful thing about equilibrium--the causes are irrelevant.
The only important thing is that everything eventually finds its way
back to balance.See More
2 hours ago · LikeUnlike
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Skinny Hoar I wish that was true the last time a cop made
me walk a straight line....
about an hour ago · LikeUnlike
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John Von Achen
Barry, Consumer waste is a social issue and benefits
business. Caps are government regulation that hurts the industries
profits, but that doesn't mean they produce less unless the production
is driving a loss. There is a huge difference b...etween making small
profits per unit, versus taking a per unit loss. Small profits force
businesses to press for increased share so that they maintain the
profits expected of them. When profits are lower one can also increase
the margins by increasing the volume. I am not saying I agree with the
caps that were put in place, but I can see a reason for putting them
in place.

Paul, dead weight loss may not be economically efficient,
but it doesn't mean that the volume will decrease. It potentially
makes the market pie larger in this scenario.
You did get me on the labor, but labor often has contracts
associated with it. In the same way that many fixed costs are based on
contracts. For labor that is not contracted, any business would need
to decide if they benefit more from increasing volume (potentially
adding to labor, or efficiency), or slow down.
I agree on OPEC and purposely left that alone to avoid a
lengthy digression. I'm not convinced that WS will do better w/o
proper regs. Bubbles are dangerous.
See More
about an hour ago · LikeUnlike ·
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Barry Day
John, that's a very short-sighted answer. Consumer waste
may benefit business, but it's hardly under the businesses' control.
You're making the assumption here that consumers simply have entirely
too much money and aren't smart enough to ...conserve, and therefore
Big Brother needs to step in to tell consumers what's best for them.
Problem is, it doesn't work.

Another reason your answer is short-sighted is because you
fail to take into account Minimum Rate of Return (MRR). If I can
invest in one company that gives me a 5% return on my investment or
another company that gives me a 10% return on my investment, where do
you think I'll invest? This is especially true for larger
corporations, who have obligations to their shareholders (i.e. the
OWNERS), which they must fulfill. You can't honestly believe that any
business that turns a profit, however meager, is going to continue
along that path no matter what, do you?

Thirdly, and this is a big one, that's a fallacy that you
can just increase margins by increasing volume. The reason for that is
because you aren't taking into account demand in a push scenario, or
capital expenditures in a pull scenario. In the former instance, you
have a repeat of the 1873 Depression due to overproduction of
agriculture (and since farmers weren't good at economics either and
they were vital to our survival, the government did the only thing it
could: pay farmers subsidies to *not* grow crops, unless demand
increased). The latter instance you have a situation where profit
margins are too low to invest in more power plants, oil refineries, or
even oil wells. You don't think that every company that needs capital
can just go to a bank and get money, do you? For large capital
expenditures, you need investors, and those investors want reassurance
that you're going to give them a greater return than the other
business they want to invest it.

I'm glad you don't agree with price caps. Now, hopefully
I've demonstrated why there truly is no point to them and in fact,
price caps can only HURT an economy. Again, the real-life example
happened in the late 1970's. Regardless of the political reasons for
OPEC cutting production, supply dried up. The Carter Administration
refused to let the Invisible Hand force people to conserve, and the
end result was that we had ridiculous shortages. If we didn't have a
farmer for a president (see my above comment about farmers and
economics), perhaps we would have a much better public transportation
system today.See More
about an hour ago · LikeUnlike
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Paul Ferrante
Half correct, John. Price caps don't just decrease
profits; they decrease the marginal revenue per unit. Also, they
always lead to a shortage of the good/service produced and the most
obvious example was the gas shotage of the early 1970'...s. The only
exception: natural monopolies like the water company where caps must
be put in place.

Lowering profits, on the other hand, may not necessarily
lead to a decrease in production. In fact, lowered profits often lead
to innovation and differentiation due to the desire to increase
profit. However, price caps do NOT lower profitability; competition
does. This is the classic mistake most people make. They believe caps
will just cause a decrease in profit and that the loss will only come
from profit. In fact, sometimes shortages from caps lead to a higher
profit margin. The lost revenue is what causes the shortage

There is always a need for some regulation and bubbles are
dangerous. But, all the government regulation in the world cannot
prevent them especially considering the oil is a global market.

There are advantages and disadvantages to both the British
and our system.See More
about an hour ago · LikeUnlike
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John Von Achen
Thanks for all of the debate, I think that I certainly
gained from this.

Perhaps my perspective was limited to how players within a
single industry respond to each other when a constraint is placed on
the entire industry. I neglected to acc...ount for investors choosing
to invest with other industries. However, these companies would still
be competing to stay in the black while gaining advantage over their
competition. I do think that there is nearly always an investor for
every industry at any given time, however, that market pie certainly
grows when its MRR is higher than other industries.
Also I was assuming that the industry would not have to
exceed 100% of its current capacity to meet the demand requirements.
With this assumption I still would have been better off saying that
Cost decreases not necessarily margin for reasons mentioned by Barry
in his "Push" scenario.
I'm not wholly convinced that caps cannot serve ANY
benefit, but I have more to think about and I would exercise caution
before promoting them.

You both seem well schooled on the gas shortage and I have
to admit I am less so. I'm concerned that it might be more of a
monopoly vs cap as Paul's water company example, except that politics
resulted in a supply cut off. Perhaps we can open that as a new thread
so you can better instruct me on the details.