Price Controls and Communism

What happens when the prices of all goods are controlled? Under communism, or a command economy, this is exactly what occurs. As a result, all of the effects of price controls become amplified: there are even more shortages or surpluses of goods, lower product quality, longer lines and more search costs, more losses in gains from trade, and more misallocation of resources. As we have seen, universal price controls destroy market coordination and create a system of planned chaos in which it becomes more difficult for consumers to get the goods and services they want and need.
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- We conclude our discussion of price
controls by talking about price controls

and communism or planned economy. This
will be brief because the idea is pretty

simple. We've already looked at all the
effects of price controls in different

markets. But we can think about communism
as being in some ways a system of

universal price control. Everything is
controlled by the government. The price of

all goods is controlled by the government.
So, if a single price control can have bad

effects, what happens when you control the
prices of all goods? Let's take a look.

Let's just remind ourselves of some of the
important effects of price controls both

ceilings and floors, shortages and
surpluses depending upon whether we have

the price below the market price or the
floor above the market price. Reductions

in product quality or sometimes too much
quality, too much waste. Wasteful lines

and other search costs. Loss in gains from
trade and misallocation of resources.

Now, communism, a command economy can be
thought of as a system of universal price

controls, price controls on all goods. And
we saw exactly these five elements

occurring in countries which had universal
price controls, such as the Soviet Union.

It was common for some goods to be in
shortage while other goods had surpluses.

Low-quality goods for most, with wasteful
quality for other,

wasteful lines and other search costs.

During the Soviet Union Communist period,
it was common for women to spend, on

average, two hours of every single day,
weekdays, and weekends, just lining up to

get consumer goods. Clear loss of gains
from trade and a misallocation of

resources. So it was very common
in the Soviet Union

to spend lots of
resources producing agricultural products,

and then not have the trucks to bring
those products to market.

It was common to be producing radios, have
everything you need to produce the radio

except for one single part, which was in
shortage. So you could not produce the

radios. Remember the
situation we described for

heating oil in the United
States during the 1970s.

When in some parts of the country there
was plenty of heating oil. There was

enough heating oil so that people were
heating their swimming pools. While in

other parts of the country there wasn't
enough and people were shivering in their

homes. Those types of misallocation of
resources were the norm, were normal, were

everyday occurrences in the Soviet Union
during its system of communism, or a

command economy,
or universal price controls.

All of these issues came to affect an
entire economy. In short, what communism

did really was a substitution of planned
chaos, a chaotic economic system, instead

of having market coordination. Okay,
thanks very much.

That will conclude our
lectures on price controls.

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