Credit: Houses of the Oireachtas

Why “Price Controls on Groceries” is an immeasurably bad idea

The idea that the Government should intervene to protect the public from the cost of living crisis is, quite understandably, popular. And of course, there are things that the Government can do, which make an positive impact on people’s bills – for example, to my mind they are not getting sufficient political credit for the well-structured and effective subsidy they provided to people’s electricity bills over the winter. No intervention is perfect – the electricity subsidy for example went straight into the pocket of the electricity suppliers – but it did provide relief to homeowners struggling with bills.

There are some ideas, though, which are so wrong headed as to make it impossible to believe that a serious, half intelligent person could genuinely be calling for them. “Price Controls on Groceries” is one such idea, and here is somebody who is well above average intelligence calling for them anyway:

To explain why “price controls on groceries” is such a terrible idea, it is useful to think about a single banana.

Most of us have, at some point, purchased a banana, either for ourselves or for someone else. The banana we purchased was not, we know, grown in Ireland – because our weather does not support banana growing. Most Irish bananas are grown on Mozambique – a large island on the south-eastern coast of the African continent. Those bananas are then preserved, put into containers, and shipped – usually by boat – to Ireland. Some of them may be flown here.

When you purchase a banana in the shops, the price covers various costs: It covers the cost of growing the banana. It covers the cost of preserving it. It covers the cost of shipping it to Ireland. It covers the cost of labelling it and ensuring that it conforms to Irish and European food safety standards. A portion of the price pays the wages of the staff in the shop. A portion of it covers taxes. And a portion of it is profit for the shop.

A price control law would say, in effect, that it is illegal for the shop to increase the price of that banana. In order to protect you from the cost of living, the price in the shop would have to remain static, for as long as the price control law remained in place.

But of course, Irish price control laws would not apply in Mozambique. Nor do they apply to the global price of oil, used in shipping. Or to a hundred other international variables that might influence the price the supermarket or corner shop pays for a banana.

What happens, then, if the price of a banana on the international market increases by 10%? Irish shops, in that case, will have two choices: Either they continue to sell bananas, making a loss on the product, or they stop selling bananas altogether to avoid making a loss. The option of increasing the price – and giving the consumer the choice over whether or not to buy a more expensive banana – is banned by law.

In this situation, to keep bananas on the shelves and keep the price low, the Irish Government would have to directly subsidise Supermarkets for the losses they made on selling bananas at the lower price. And not just bananas – just about every product which became loss-making on foot of price controls.

There are, of course, alternative ways to support people without making such a drastic and ill-advised intervention in the market: For example, a government that wished to do so could simply issue redeemable food vouchers to people which supermarkets and local shops could claim back from the state. This would have the same net effect as price controls and subsidies, but without the inevitable chaos and crisis that those price controls would bring about in between the price controls doing their damage, and the political debate about subsidies.

No doubt, there are many people to whom the idea of price controls sound reasonable and noble, on the basis that they believe that such measures would put an end to supermarket profiteering. But they would not: Because when you take away the profits on a product, you also take away the incentive to supply it in the first place. In the end, you end up, like Venezuela, with toilet roll shortages.

By the way, if you doubt me, consider that we have, in Ireland, price controls on the rent of property. Since those price controls were introduced, has the supply of rental property risen, or fallen? Has the housing crisis gotten better, or worse?

Someday, perhaps, most of us might put two and two together on that issue. For now, I hope, we can at least agree to leave the bananas alone.

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