Rational Ignorance and Price Controls

_44265328__shelfafp203 Thanks to the blog Too Conservative, I saw an interesting Gallup Poll that says that 53% of Americans support price controls on gas. First, I am going to briefly tell you why price controls are bad. Then, I am going to discuss the issue about whether or not this truly makes people smart or ignorant. (The picture is explained below)

Price controls are an age old tool that government have used to try to rein in inflation. They have been employed on some good and in the Soviet Union they were employed on all goods. So the question is if the government can give me gas for $2.00 a gallon and I was paying $5.00 a gallon, why is that bad?

First, it is obvious if tomorrow all the gas stations had all the gas it has now and was forced to sell it at $2.00 a gallon by the government the demand would be much higher than the supply. See below:

PRice Control

As you can see the quantity that consumers would want would be out at QD but the actual supply would be at QS, you can then conclude that there would be a shortage between QS and QD. This is like what Nixon did in the 70’s. There would be massive shortages and rationing. This is also currently happening in Zimbabwe because they are facing high inflation. The picture above is what the shelves look like there now, as it has become impossible to measure inflation due to shortages.

If we did allow ourselves to be dictated by the 53% of Americans who think that price controls on gas would help we would have massive shortages and would have to go back to rationing. In many cases, you would even have a black market for oil. It is obviously a little hard with gas to have a black market.

A blogger from Too Conservative cleverly titles the article that “53% of Americans are idiots.” I would usually agree but Public Choice economics asks but “are they really?” When it comes to most things it is very difficult to find all the right information and this creates a high cost for Americans to find out what price controls really do. If the costs are very high to finding out many times people are rationally ignorant to not look into those things. This is true of the sugar subsidies I constantly complain about. The costs of finding the information out, buying paper and ink, along with the postage for every American to write their congressman and demand a change of policy costs close to the amount each person is hurt by the subsidies. Now number figures are different so it may be more or less, that is unimportant right now.

When it comes to rational ignorance about price controls it really interests me. Price controls to me are pretty costly. The rationing along with the shortages stagnated our economy in the 70’s and most people were miserable. You would imagine that the costs would be really high.

On the other hand I did have to go to college and learn about supply and demand to really understand what a price control does. But American’s no longer have to do that they can just read this post. I have lowered their costs. Or have I?

First, they have to trust me so there is some kind of trust costs. Assuming that they do trust me and believe every word. They then have to involve themselves in a campaign to stop the price controls and that may not even change the mind of the politicians.

What is important to realize is that our system is set up to create rational ignorant voters. If me and the Too Conservative blogger were able to convince the 11th district of Virginia that price controls are bad that is 1/365 congressmen and 1/5 of the votes of Virginia for the Senate candidates.

This is what Gordon Tullock and James Buchanan laid out when they explained the “Collective Action” problem. Even though it may benefit people to band together, individually there is no real incentive to do so. Part of this is the free rider problem, where only 50%+ 1 people in the 11th district needs to be informed (assuming the congressman is taking a vote to decide his stance) and the other 49% then free ride off of our knowledge.

~PCCapitalist

Advertisements
Published in: on June 5, 2008 at 8:45 pm  Comments (1)  
Tags:

The URI to TrackBack this entry is: https://pccapitalist.wordpress.com/2008/06/05/rational-ignorance-and-price-controls/trackback/

RSS feed for comments on this post.

One CommentLeave a comment

  1. Thank you for the good writeup. It in truth was a entertainment account
    it. Look advanced to more added agreeable from you! By the way, how can we keep up a correspondence?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: