Hail to Prices!
Price Controls Have Predictable Consequences
JULY 01, 1995 by JEFFERY G. LEE
Mr. Lee resides in Long Beach, California.
Recently in South Korea I had an experience that bodes poorly for proponents of price controls. During my stay, a Korean friend, D.J., took me to a bar to soak up a bit of local flavor. After a good time, my friend and I left the bar just before midnight in search of a cab. As we were going in separate directions, I said goodbye and prepared to flag down a taxi. D.J., however, knew something I didn’t and stayed with me despite my assurances that I could handle myself. I’m thankful he stayed.
I was completely unprepared for what happened. Crowds of people began creeping dangerously far out into the street. D.J. joined the fray, facing the oncoming taxis like a modern-day matador. Cabs slowed just enough for D.J. and others to yell their desired destinations into the open window (Pangbae Station in our case). Without fail, after hearing the places we and others were intent on going, cab after cab sped off leaving us in clouds of exhaust and bewilderment.
After about 20 minutes, it was apparent that it might take a while to actually get picked up. Interestingly, D.J. “upped the ante” for the ungracious drivers. “Pangbae!”—in endless repetition—had been all that I had heard for nearly a half-hour when my friend began yelling “Pangbae DOUBLE!” He even yelled “Pangbae TRIPLE!” at a driver who stopped only long enough to flash four fingers hoping for four times the normal fare. Later, we stopped a taxi with a “triple.” We got in, only to be told to get out when the driver reconfirmed our destination. He said he had misunderstood us and wouldn’t go to Pangbae Station.
Later I discovered the reason for this black market in transport. Taxi rates are set by the government. Ostensibly to protect the consumer, the government limits the price taxi companies can charge. The consequence of such myopic legislation should be obvious to any first-year economics student. The artificially low fare not only reduces the supply of taxis, but decreases the incentive of remaining drivers to provide good services to passengers. Full of good but misdirected intentions, government officials have taken it upon themselves to protect the consumer. Ironically, the result is just the opposite. As with all examples of price control throughout history, demand exceeds supply when an artificially low price is mandated, resulting in various degrees of chaos.
After an hour and a half we flagged down a willing driver and made it home. Because our quest was limited to cross-town transportation, the most we suffered was the indignity of standing in the middle of the road, in addition to a few lost hours of sleep. Raise the stakes from the taxi scenario and consequences are more devastating. Instead of commuters, picture physically ill folks clamoring for health-care professionals. “Pangbae double!” might suffice as a potential solution when negotiating for something as simple as a ride. I don’t imagine, however, an equally likely “heart attack double!” would be a very amenable strategy.
Low prices might appear to the uninitiated as desirable. But prices are no culprit. Prices provide ready information on the availability of goods and services, and on the values of goods and services to competing would-be users. Attempts to artificially alter prices are tantamount to removing signs from dangerous roads. Prices fairly balance the amounts of a good available and the amounts demanded. Of course, prices are also the most visible and easily targeted feature of a market economy. Unfortunately, politicians, eager to placate their benefactors, have more influence than economic truths on the formation of public policy.
I do not mean to insinuate any backwardness on the part of Korea (which would upset my Korean wife immeasurably). It just so happened that this experience reminded me of the endless gas lines of the 1970s and of the recent debate over health care in the United States. As economically enlightened as we are in America, we are not immune to a “calculated reversion” to the illogic of price controls. Symptomatic cures for what some may see as the pestilence of prices are misdirected. Hopefully, people can now see through quick-fix solutions to economic problems. If not, maybe something as simple as a taxi ride in Korea would be sufficient to cure their economic myopia.