Should the government just ban high prices?

Voters want stuff to be cheaper.

To most economists, the best way to make things more affordable is to make them more plentiful: When the supply of a good rises, its price tends to fall. Thus, to push down the costs of expensive commodities, the government should make them easier to produce. 

For example, zoning restrictions make it illegal to build apartment towers in many urban centers. This reduces the supply of housing, which leads to higher rents. Therefore, economists argue that the government should make housing more affordable by legalizing the construction of multifamily buildings.

But voters don’t love this answer. After all, it asks them to accept some immediate costs (construction noise, for example) for hypothetical future benefits. More critically, supply-side reforms do little to address their affordability concerns today. When a city council votes to upzone a neighborhood, a dozen condo towers don’t promptly sprout up through the concrete. 

So, some politicians have recently gravitated towards a simpler solution to high prices: Make prices above a certain threshold illegal.

In New York City, mayor-elect Zohran Mamdani campaigned on a promise to “freeze the rent” on rent-stabilized apartments. In New Jersey, the incoming Democratic governor, Mikie Sherrill, vowed to cap electricity rates.

Economists consider such price controls counterproductive in most markets because they discourage investment, thereby reducing affordability in the long run. Yet some of the Democratic Party’s leading economic thinkers are warming to them — sort of.

Can voters have a little bad economic policy, as a treat?

In a New York Times op-ed last week, former Biden administration official Bharat Ramamurti and economist Neale Mahoney argue that price controls tend to be economically corrosive, but that Democrats should embrace them, anyway.

Their case is primarily political. In their telling, “voters are demanding short-term price relief” and “price controls may be the only viable way to provide it.” Ramamurti and Mahoney acknowledge that price caps have often backfired historically, leading to lower production and less affordability in the long run. But they contend that policymakers can largely avoid these pitfalls by making their price controls temporary. Essentially, they suggest that the government should increase the supply of energy and housing through public investment and regulatory reform — but, while we’re waiting for those new houses and power plants to come online, it should tide consumers over with price controls. 

I think this argument is largely misguided, for four chief reasons:

• The economic costs of most price controls are quite large.

• Price controls are rarely the best way to address affordability concerns, even in the short-term.

• Letting a “temporary” price control expire is politically difficult.

• Achieving the public’s preferred economic outcomes is more important than echoing its policy intuitions. 

Most price controls take a big toll

The case against price controls boils down to one simple claim: When prices move freely, they can make the economy work efficiently, to everyone’s benefit. 

In competitive markets, rising prices are a symptom, not a disease. They signal that a good has become either more scarce or more desired: If a Labubu factory burns down, then the supply of Labubus available to consumers will shrink. If wearing a menagerie of slightly monstrous stuffed animals somehow becomes fashionable, then demand for Labubus will soar. Either way, a mismatch between how many Labubus people will want — and how many producers can provide — will emerge. If the price of Labubus is allowed to rise and fall freely, then this mismatch will become visible. 

Price increases therefore surface critical information about supply-and-demand mismatches. And they also give both producers and consumers an incentive to mitigate those incongruities.

When Labubu prices rise, producers earn higher profits, which encourages investors to direct more capital into Labubu production. Over time, that leads to more — and therefore cheaper — Labubus on the market.

This same dynamic holds for more vital goods, such as electricity. If a gas plant breaks down, and the power supply in an area suddenly falls, then electricity prices will rise. And that will attract investment toward new power infrastructure — solar panels, gas plants, transmission lines — which will make electricity more plentiful in the long run.

In the meantime, elevated prices help consumers ration scarce power efficiently. Rising rates discourage individuals from using power frivolously — such as by leaving the lights on when they’re not home — freeing up electricity for more essential uses. 

Price controls undermine these mechanisms of economic coordination. When a city caps rents on existing housing units, it discourages investment in new residences. In fact, San Francisco’s 1994 rent control law actually reduced the supply of rental homes in the city, as many landlords converted their units into condos or commercial properties. This ultimately led to higher rents.

Likewise, price controls can undermine efficient rationing. Gasoline was in short supply in the early 1970s. When gas prices moved freely, this led consumers to economize: People cut back on inessential trips, leaving more gasoline available to commuters. When Richard Nixon put a price cap on gas, however, scarce fuel was allocated more haphazardly. People who showed up to a station at the right time got below-market price gasoline; those who arrived a bit later got no fuel whatsoever, since the pumps had run dry.

This is not to say that market prices always produce efficient or socially desirable outcomes. Markets can fail in all sorts of ways. And in some eccentric sectors — where consumers have little choice, sellers have little competition, or the government drives demand — price controls can actually be beneficial. 

Healthcare may be the clearest example. The market for mastectomies isn’t much like the one for Labubus. When the price of a life-saving surgery rises, consumers don’t respond by purchasing a different, lower-cost medical procedure; people are generally willing to pay most any sum to avoid death. And in any case, most people have insurance that will cover at least some of the cost of a medically necessary operation, irrespective of its price.

For these reasons, allowing healthcare prices to rise won’t necessarily promote efficiency. Rather, doing so might just transfer income from patients and insurers to doctors, hospitals, and drugmakers. Putting limits on what providers can charge, therefore, makes sense and is common practice in advanced economies.

Free markets don’t ration scarce resources justly. But neither do price controls.

This said, there is a natural objection to rationing scarce consumer goods through market prices: Rich people can afford to pay more for goods and services than poor people can. 

Perhaps, the argument goes, elevated prices will divert electricity from frivolous uses to essential ones. But high rates could just as easily shift kilowatts away from a working-class person’s air conditioning to a billionaire’s private ice rink.

This is a legitimate concern. And there are circumstances in which policymakers would be wise to impose non-market rationing systems in light of it. Amid a devastating drought, governments should ensure that all households have enough water for basic needs before allowing golf courses to keep their fairways green — even if the latter can outbid the former in the marketplace.

Nevertheless, for several reasons, price controls generally aren’t the best way to ensure a just allocation of resources amid temporary shortages.

First, a price control does not actually shift scarce goods towards the least fortunate: It caps the price that everyone pays — even the rich — rather than reducing costs specifically for the disadvantaged.

Second, a price control often functions like a tax on the production of a good that’s already in short supply. At an intuitive level, there’s an appeal to compensating the victims of high prices by taking money from those who are charging them the exorbitant rates: When tenants are paying high rents — and landlords are making large profits — there’s some justice in redistributing from the latter to the former. 

And yet, if there is a housing shortage, then funding transfers to working-class tenants by taxing producers of housing — rather than rich people in general — doesn’t make much sense. Doing so effectively encourages the wealthy to invest in anything besides new housing. 

Third, since price controls tend to undermine long-term supply, their ultimate distributional implications can be complex and regressive. Rent control does not simply transfer income from landlords to tenants. Rather, it often redistributes from newer residents to long-time ones, from younger households to older ones, and — over the long run — from renters to landlords by constraining new construction and driving up market rents.

For all these reasons, the best way to address short-term affordability challenges is to shift purchasing power from the rich to the working class through taxes and transfers. 

Ramamurti and Mahoney dismiss this option on the grounds that giving people more money to purchase housing or electricity often pushes up demand, and thus, prices.

Yet if a transfer program is properly designed, this should not be too great a concern. The affluent account for a disproportionate share of consumption. So hiking their taxes will meaningfully reduce consumer demand. If the government then targets aid at those who are most in need, then it will increase that portion of the public’s purchasing power without putting much upward pressure on prices.

“Temporary” price controls die hard

Ramamurti and Mahoney are well aware of price controls’ downsides. But they suggest these costs can be mitigated by making price caps temporary. In their view, if policymakers put “sunset clauses” into their rent or utility freezes, then such measures won’t take that big a bite out of long-term investment and supply.

Yet there’s a tension in this argument. On the one hand, Ramamurti and Mahoney suggest that voters won’t tolerate politicians who oppose new price controls. On the other hand, their plan assumes that electorates will allow future politicians to let already-existing price controls expire.

This isn’t logically contradictory. But it seems empirically dubious. After all, voters famously exhibit status-quo bias and loss aversion — which is to say, they prioritize avoiding losses over securing gains. For this reason, they are much more likely to punish politicians for taking away existing benefits than failing to create new ones.

If a price control is economically disastrous and unpopular, then this dynamic won’t prevent its repeal. Nixon had little trouble phasing out his price caps once they’d yielded shortages and inflation. But Ramamurti and Mahoney clearly presume that their price controls would be valued by some constituencies. And this has certainly been true of rent control: Those who happen to live in rent-controlled units tend to appreciate the policy. For precisely this reason, however, “temporary” rent controls tend to have staying power: New York implemented rent limits as an emergency measure after World War II. Yet various rent restrictions remain on the books in NYC to this day. 

Thus, if policymakers must avoid permanent price controls — as Ramamurti and Mahoney seem to believe — it’s not clear why it would be politically easier for them to do this by implementing controls and then letting them expire, rather than simply never imposing controls in the first place.

To be fair, I suspect Ramamurti and Mahoney have an implicit answer to this: There is an affordability crisis today, but there won’t be one tomorrow, if policymakers take various steps to expand the supply of key goods. Therefore, demand for price controls will decline over time.

But there are two problems with that reasoning. First, as just noted, some rent control measures enacted amid acute shortages never fully expired, even during times when housing was relatively well-supplied. 

Second, by historical standards, life is unusually affordable for Americans today. Accounting for inflation, the median US household earned a higher income in 2024 than at any time on record. Today, prices are rising at a historically unremarkable 3 percent rate, while unemployment is relatively low. 

None of this means that ordinary Americans should be grateful for their lot. Housing is outrageously and needlessly expensive. The rich commandeer a grossly outsize share of wealth and growth. The typical US household may be better off today than it was in the past. But it could be dramatically more comfortable, if economic policy were more efficient and egalitarian. 

My point is simply that today’s economic problems aren’t exceptional. If they constitute an emergency that demands price caps, then future conditions are liable to constitute the same — especially since price controls tend to make life less affordable over the long term.

What voters want even more than price controls

All of this said, there may nevertheless be contexts where embracing temporary price controls is justified on political grounds. 

Rent control polls extremely well. And the issue is highly salient in some places; it seems doubtful that an opponent of rent limitations could have won New York City’s mayoral race this year. 

Politicians can’t implement reforms that truly enhance affordability if they cannot get elected. Further, there is some evidence that tenants are more supportive of new construction when they enjoy rent protections. 

For these reasons, it’s conceivable that some municipal politicians can best advance the cause of housing abundance by embracing narrow forms of rent control.

But at the national level, neither party faces a political imperative to embrace price controls. Given this, they should not enact controls that will, in practice, make most people worse off — both because doing so is bad in principle and because voters are unlikely to reward politicians who deliver unpopular economic outcomes (no matter how well their counterproductive economic policies may initially poll). 

Instead, national candidates should campaign on the broad goal of making life more affordable for ordinary Americans — then, once in power, they should pursue policies that would actually do that. 

In the peculiar market for prescription drugs — in which companies commonly hold patent monopolies that forbid competition and the government picks up much of the bill — this would likely involve imposing some price controls. When it comes to housing and energy, by contrast, delivering greater affordability will principally require cutting red tape and increasing public investment. Meanwhile, to ensure a more just distribution of scarce resources, policymakers can increase taxes on the rich and social welfare benefits for working people.

Perhaps, this platform would buy candidates fewer votes than across-the-board price controls. But the latter’s cost is too damn high.