Every day, over 300 million people & businesses buy and sell goods and services. This natural market interaction creates something remarkable and useful and free – the price of things.
Boring you say? Who cares about the price of things? You do. Every time you fill your car with gas, buy groceries, get a new pair of shoes or turn on cable TV. The price of gas, groceries, shoes, cable TV, of anything conveys information. It tells us who is currently winning the battle between supply and demand. It also tells us how we should change your behavior to take advantage of or protect ourselves from the battle. If the price of gas is too high it means demand is greater than supply. Because of the high gas prices, we get angry and yell at the gas companies when we fill up at the pump. AND we take action. We drive less, buy more fuel efficient cars and make sure our tire pressure is at the correct level. In other words, we buy or demand less. Less demand and stable supply means prices go down.
The little actions that each one of us does naturally every day affect demand.
It works the other way too. If there is more hamburger meat (supply) and prices go down, I buy more (demand).
Prices go down, I buy more making prices go back up.
Prices go up, I buy less making prices go back down.
Up, down, up, down go the prices showing who is currently winning the supply/demand battle. I change my behavior to affect the battle and help change the price. It is a giant ongoing feedback mechanism and one of the key aspects that make capitalism work.
Just about the only thing that can break this feedback mechanism is Government. After all, you or I cannot set the price of goods and services. We cannot make people buy no matter what the price. Our customers would laugh in our face, go down the block or pull up a different web page and buy it cheaper from our competitors. But the Government can set a price. It can say “All sugar sold in the USA will cost at least 21 cents per pound”. And that’s that, end of story. It would not matter that other sweeteners get invented or that sugar only costs 11 cents overseas. Here, in the USA, because the Government says so, sugar costs at least 21 cents a pound. This is where problems begin.
Once Government sets a price, it creates something that does not truly reflect supply and demand (our input on the price of things). A Government set price creates many unintended and bad side effects. People who supply things get rewarded unjustly or use capital unwisely to meet artificial demand. We, consumers, get hurt through higher prices and end up spending money we could have otherwise spent or saved on other things. Things we really wanted, not the higher prices.
Besides these bad effects, Government sets prices do even more damage by creating black markets. If the Government sets prices to high it practically invites smugglers and other lawbreakers in. For example, during Prohibition it was illegal to buy or sell alcohol (wine, whisky, beer…). In essence, the Government set the price of alcohol at a very high price. However, just because the Government sets a high price and stops most demand, it cannot cut off all demand. If you wanted to celebrate your birthday or job promotion during Prohibition with your friends and a bottle of Canadian Whisky all you had to do was find out where the local speakeasy was, say the secret word and have fun. Who knows, you might even get lucky that night and see a real gangster, local politician, or cop (At least that’s what I saw on Chicago staring Richard Gere, Catherine Zeta-Jones and Renée Zellweger).
Black markets are not regulated, taxed and make good people to do bad things (like smuggle and bribe to evade the law).
By letting the free market determine the price of things, we all benefit. Government should take a hands off or “laissez-fraire” approach to prices and not regulate them in any way.
Do you know of any other bad things that can happen when Governments set prices?
Posted by Nicholas Gerber 
Go Gerber 