Price controls accounted for 40% of the increase in world wheat prices in 2010-11, according to the World Bank
to economists, are determined by supply and demand, acting like the twin blades of a pair of scissors. But that is not the whole story. In many times and places, prices have instead been set by the blunter blades of political pressure and government response.
The ubiquity of price controls shows that economists have less influence than many people think. Few measures are as unpopular with the profession, which sees prices as both a signal of scarcity and a spur to overcome it. Controlling them scrambles the signal and blunts the spur. Price floors result in food rotting in warehouses. Ceilings lead to underinvestment, hoarding and black markets.
One reason not to impose price controls is that they are so hard to remove. “We struggled to find an example where it has gone very smoothly,” says Franziska Ohnsorge, a lead author of the bank’s “Global Economic Prospects” report. A fare increase last year on Santiago’s metro of 30 pesos was the trigger for widespread unrest that brought Chile’s army onto the streets and resulted in 29 deaths.
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