North Carolina hurts its consumers and taxpayers when it tries to control prices, according to the John Locke Foundation’s new Macon Series report. That includes so-called “price gouging” laws and a mandated minimum wage.
“Prices are not simply arbitrary numbers picked by a seller to put on a price tag,” said Dr. Roy Cordato, JLF vice president for research and resident scholar. “Lawmakers don’t seem to understand that unregulated prices can make the difference between social chaos and harmonious coordination of people’s plans.”
Basic economic principles expose the flaws in price controls, Cordato said. “It is impossible for lawmakers to improve on the prices that are arrived at through the interplay of supply and demand in the marketplace,” he said. “Every free exchange makes both parties better off.
“Every exchange that is prevented because the government has outlawed the price that would bring about agreement between potential trading partners harms those parties by preventing them from pursuing a course of action that would improve their well-being.”
For example, “price gouging” laws place artificial caps on prices that thwart the natural market forces of supply and demand, Cordato said. “Freely fluctuating prices tied to a free market ensure that producers produce in quantities that satisfy the desires of consumers,” he said. “Price increases alleviate shortages or prevent shortages from occurring.
“When prices are not allowed to adjust to changing market conditions, chaos can and will ensue. Think of the cap on gasoline prices in the 1970s. When the market was not allowed to operate freely, it’s no coincidence that drivers faced long gas lines and limits on the amount of gas they could buy.”
The problem extends to price “floors” as well as price caps, Cordato said. A government-mandated minimum wage is a price floor. “With a minimum wage, an employer knows he must hire only those workers who can generate productive output equal to the wage plus benefits,” he said. “Workers who don’t have the skills to generate that output won’t get jobs. The people who need low-wage jobs the most are priced out of the job market.
“In preventing very low-skilled workers from entering the labor force, minimum-wage laws deny them the opportunity to move up the economic ladder. The government is denying a worker the chance to gain job experience that could help him earn a higher wage.”
Along with the minimum wage and price gouging laws, Cordato discredits usury laws and minimum prices for gasoline.
“The only posture that state, local, or federal governments should take with respect to prices is to stay out of the way,” Cordato said. “Prices freely agreed to in the marketplace prevent shortages and surpluses. Price controls of any kind are anti-social and inconsistent with the goal of creating a free and prosperous society.”
The Nathaniel Macon Research Series generates annual papers from JLF analysts. The Macon Series applies free-market principles to current N.C. controversies. Its papers examine whether N.C. fiscal and regulatory policies help or hinder individuals as they seek to create or expand economic opportunities.