By Aaron Newell
Prices are the conductors of the economic orchestra that guide resources from places where they have relatively low value to places where they have relatively high value. When these prices are interfered with, people are left worse off than if the prices had been left alone.
Art Carden, Associate Professor of Economics at Samford University, spoke as a part of the ACRE Distinguished Speaker Series on March 12 about this and other ideas. His lecture, “Free the Prices: How Public Policies Hurt the People They’re Supposed to Help,” discussed three common ways prices are interfered with by the government: price ceilings, price floors, and tariffs (special taxes on imported goods).
Price ceilings
Dr. Carden began by describing what an economic equilibrium is and how distorting prices can shift equilibriums and result in harms. Carden uses a recent example from his home state, Alabama.Tornadoes and heavy rainfall have led to a disaster declaration. In these situations, many people, and some legislators, argue for or implement price gouging laws. These laws are intended to protect vulnerable people. After a disaster, there is a big increase in demand for certain goods: gas, plywood, water, etc. There is also a decrease in supply due to the effects of the disaster. These two things working together cause prices to rise. More people want more gas, and there is less to go around. Price gouging laws prevent prices from increasing. On outcome is that people end up waiting in gas lines. They are paying with their time instead of with their dollars.
Allowing prices to rise gives suppliers the information they need to direct resources to those areas. At the “normal” price for gas, suppliers may not direct more gas to that area. If the price was allowed to rise, suppliers would get the information they need and would redirect their resources to the area in need, making people better off as the increased supply brings the prices back down once the extra need it met.
Price floors
Price floors also distort prices. One such example is the minimum wage. While many people believe the recent vote to increase Arkansas’s minimum wage will be a good thing for lower wage workers, Carden believes that it will end up hurting those who need help. Many economists believe that while raising the minimum wage may result in some reduction in employment, people accept that because the people who remain employed will see higher wages. Carden reminds us that wages are just one form of compensation. There are also things like flexibility, benefits, perks, and job satisfaction. A higher minimum wage requires people to take more of their compensation in wages rather than in other forms of compensation. And evidence does suggest that in places where the minimum wage is higher, people see fewer benefits, less flexibility, and harder and more intense jobs.
Tariffs
Lastly, Dr. Carden spoke about the harmful effects of tariffs. Using the example of the sugar industry, he explained why every time he leaves the US, he drinks a Coke that is made “the way God intended it.” That is, a Coke that has real sugar in it rather than corn syrup. The reason corn syrup is so often used in the United States is because the price of sugar is higher in the US than it is around the world, due to tariffs, so producers use a cheaper, lower quality substitute – corn syrup.
These tariffs are usually imposed as a way to make certain industries better off, however, there are unseen consequences with this policy as well. US sugar tariffs benefits Florida sugar producers but at the expense of Brazilian sugar producers. Without them, the sugar industries – and other industries – would look different as a result of freer competition and perhaps be even better.
More resources
Dr. Carden gave his lecture as part of ACRE’s Distinguished Speaker Series. To view the full lecture, you can visit our YouTube page here.
ACRE researchers have recently written several blog posts on the minimum wage as well as one published paper on the minimum wage. You can also watch UCA assistant professor of economics and ACRE Scholar Dr. Jeremy Horpedahl’s AETN interview on the minimum wage, here.
To see more of ACRE’s work on the minimum wage, you can view our labor regulation page here.