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Context

Due to multiple causes such as the Russian invasion of Ukraine, most European countries have faced soaring prices for essential products. In some cases, the governments decided to impose price caps. The last such case that caught my attention was Austria, which considers price capping (among other measures):

Intervention to achieve price reductions on basic foodstuffs is gaining political momentum as calls for uniform national measures to counter increasing inflation gain steam.

This could be realised either with a reduction of the value-added tax (VAT) or a price cap, according to the social democratic Mayor and Governor of Vienna Michael Ludwig.

Austria seems to come late to this party, as other European countries tried price capping, and it did not work too well:

Question

Why do the governments still try price caps instead of other solutions such as subsidies, to prevent shortages, in the context of a rather long crisis? It seems to be known that shortages are quite certain when a price cap is issued:

Price ceilings are enacted in an attempt to keep prices low for those who demand the product—be it housing, prescription drugs, or auto insurance. But when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, and thus a shortage occurs.

the gods from engineering
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Alexei
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    As described in the answer, economic theories are not like the natural laws in physics. The are models that try to describe how economists expect the real world does or should behave. That doesn't make them less useful but this misunderstanding seems to be common among economists. – quarague Jan 02 '23 at 17:54
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    @quarague I hear this excuse a lot (usually from politicians) but basically saying "Economics is just too inaccruate" isnt an answer. Especially when so many times the problem that has occurred seems to be in violation of basic econ. And especially when policy makers have no problem using econ 101 when is comes to artificially reducing demand, and thereby reducing prices – Amon Jan 02 '23 at 18:35
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    if there is no supply, shortage will happen regardless – njzk2 Jan 02 '23 at 20:26
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    @Amon I was mostly objecting to the phrase 'known fact'. If instead it would say something like 'economic theory says this is a bad idea (link for the reasons), why do governments do it anyways?' I would be perfectly happy because a priori this allows both the answers a) governments ignore the theory and fail or b) the theory is too simplistic and doesn't apply in this case. – quarague Jan 03 '23 at 06:25
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    @njzk2 And that's the fundamental problem that is always ignored by governments. That's why these measures delay the issue at best – Amon Jan 03 '23 at 07:57
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    Hungary does currently have price caps on essential products, such as 2.8% milk, white bread, sugar, wheat and for some weird reason chicken back. Reducing demand on the cheapest of bread is called starving citizens in plain English. Whether the government opens food banks, reduces VAT or puts the burden on the retailers is what makes or breaks such alleviating measures, for example Hungary just put all the burden on retailers (which is the worst in terms of creating shortages as they won't stock products they need to sell at a loss). – user3819867 Jan 03 '23 at 09:55
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    @njzk2 no, shortages are impossible in a free market economy. Some people might no longer be able to afford something but you could always get the good in question by paying enough money. Econ 101. – JonathanReez Jan 03 '23 at 15:35
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    Being seen as doing nothing is considered worse (by some) than doing something that might end badly. There's plausible deniability that you didn't know for sure that there would be a bad outcome, and maybe you're actually hopeful that the thing that went wrong last time somehow won't go wrong this time. And when things do go wrong after the institution of your policy, you can blame someone else's greed, or flaws in "the system," and then it's time to do something else... – Jedediah Jan 03 '23 at 16:49
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    @JonathanReez an economic good that is subject to a price cap is not a part of the free market economy. Put another way, if there's a price cap on widgets that results in a market shortage, but some wealthy people can obtain widgets despite the shortage by paying a higher price, then either (1) the price cap isn't a true price cap or (2) the wealthy people and their suppliers are breaking the law by participating in the black market. That's an illicit market, not a free market. – phoog Jan 03 '23 at 19:24
  • @phoog right but njzk2@ was implying shortages are possible in a free market economy too – JonathanReez Jan 03 '23 at 19:47
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    @njzk2 However, in a free market, price increases due to constrained supply will incentivize creating more supply until the market reaches a new equilibrium point. The higher the price, the higher the incentive to increase supply (and the more otherwise-unprofitable methods of generating supply become economically viable.) Price caps limit or remove the incentive to create new supply. – reirab Jan 03 '23 at 20:33
  • @reirab that's all good on paper, but there isn't more supply, at least not in the next few years. Finding new fuel fields takes time. Planting new forests for logging takes time. – njzk2 Jan 03 '23 at 21:38
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    @JonathanReez it's more complicated than that (which is why you shouldn't have skipped econ 102, 103, 104,...). You may want to factor in the level of elasticity of both demand and supply. (2 examples: if a resource is fully destroyed, you can't buy it anymore. If a resource takes time to re-generate, you can't buy it right away) – njzk2 Jan 03 '23 at 21:47
  • @Amon delaying is good. It means people may starve less for a while, and a better solution may be found in the meantime. – njzk2 Jan 03 '23 at 21:48
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    @njzk2 There's no need to either find new oil fields nor to plant new forests. There is no lack of known available oil deposits, nor of loggable forests. The problem in both cases is the price needing to be high enough for it to be worth extracting from the more expensive sources and/or starting back up production that ceased when the prices plummeted in 2020 in the case of oil and the price being high enough to be able to afford hiring people to do the actual logging in the case logging. It's not like anyone actually ran out of oil deposits or forests. – reirab Jan 03 '23 at 21:48
  • @njzk2 The current proven oil reserves are enough to meet global supply for the next around 50 years even if no new viable sources are discovered and no currently-unviable sources become viable due to new technology and/or different economic situations. (Of course, regulatory environments also affect this. Arbitrarily cancelling existing oil projects into which billions have been invested already and/or placing a moratorium on new ones does not exactly encourage investment in increasing supply.) – reirab Jan 03 '23 at 21:54
  • @njzk2 and that better solution is more supply. However price caps are often held in place until shortages occur, which will happen fast. Since this essential product is cheap, in which case delaying is not good – Amon Jan 03 '23 at 22:10
  • Counter-point to "price caps create shortages": Localized price caps need not do so. Outside of the U.S., virtually all medical services/products are price-capped in one way or another. The U.S. caps fewer medical services/products, and the caps are higher (and likely allow said other countries to cap their prices without destroying the profit motive), without any meaningful impact on medical availability (there are other countries with greater and lesser medical availability that do impose much stricter caps). Clearly price caps don't necessarily lead to shortages. – ShadowRanger Jan 04 '23 at 21:14
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    Socialists gonna socialist? – wberry Jan 05 '23 at 01:35
  • Last time Europe decides to avoid short pain, it gets into 6 years of big hurt. So they are doing the smart thing now. – Faito Dayo Jan 05 '23 at 02:31
  • @Amon or less demand (which can mean more efficiency, or moving the demand to an other product) – njzk2 Jan 07 '23 at 18:36
  • The argument is just daft. I have ten bananas, offer them for $10 each, and sell two. Then the price is capped to $1, 20 people want to buy, all ten are sold - and that’s a food storage? Customers got 10 bananas instead of 2! – gnasher729 Mar 14 '24 at 17:55

8 Answers8

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First of all, this is one of the many situations where we have to remember that the Econ101-explanations are based on assumptions that are never going to be satisfied in reality. There rarely is an "obvious truth" in economics which shouldn't be furthered questioned.

If an increase in prices is due to a supply shortage which should be overcome with private investments to increase production, then a price cap is going to make things worse.

But that is a big "if". For example, the record profits currently obtained by many oil and gas companies strongly indicate that the current retail prices for those products are not just due to supply-issues. Moreover, the long-term solution here is to reduce demand rather than increase supply. I am no expert on Austrian food economics, but I wouldn't be that surprised if the price issues aren't about supply at all. A too extreme price cap would certainly cause problems, but it doesn't seem obvious at all that there couldn't be a sweet spot.

And then there is a secondary issue: There is a strong incentive for politicians to be seen doing something about a crisis. So in absence of good options, trying less-good options can be favoured over doing nothing.

Arno
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  • I think oil and gas prices in certain countries can definitely be related to supply issues. As far as the question goes, I think your second paragraph explains it. I've rarely seen a politician take a supply side approach, a demand side approach is easier because of course you can just create some policy to restrict some activity – Amon Jan 02 '23 at 18:32
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    @Amon Mind you, I wrote "not just due to supply issues". And of course, for oil and gas there is going to a broad range of opinions on what reasonable prices and consumption levels are. – Arno Jan 02 '23 at 18:39
  • Fair enough, also I dont think the goal of price caps is to reduce demand. price caps reduce the price, meaning demand increases, hence shortages – Amon Jan 02 '23 at 18:50
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    @Amon: In some situations, rising prices trigger increased demand, pushing prices up further and creating a vicious circle. Price caps can sometimes prevent such situations as described in my answer. – supercat Jan 02 '23 at 18:54
  • I'm not sure about those rare situations. But it doesnt seem likely that making something cheaper would reduce demand, I think they were just trying to artificially reduce the price – Amon Jan 02 '23 at 18:58
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    "Moreover the long-term solution here is to reduce demand rather than increase supply" While I agree with you, I do not think that, in the current environment, the governments are very concerned about the long-term solution. – SJuan76 Jan 02 '23 at 20:19
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    @Amon You're still oversimplifying. It's very unlikely that the demand will increase in this case. Prices have already increased considerably, leading people to conserve. Much of the reason people will buy more than usual is to insure themselves against further price increases (leading into price and buying panic spirals), which price caps prevent. Keep in mind that in the (very simple!) model where price caps lead to shortages, the shortages are caused by less investment into further production (since there's less revenue incentive). – Luaan Jan 03 '23 at 11:34
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    @Amon A typical scenario for the kind of Econ-101 thing is something like this: prices have been increasing over the board, and one of the problems is increasing meat prices. Meat prices are now very high and people can't afford meat. The government steps in and caps the price to keep the goods supplied to poor people. However, meat prices weren't increased by awful producers increasing their profit margins - they increased because (say) oats is more expensive. The price cap on meat means it's no longer possible to profitably produce meat in the current market, and supply drops like a stone. – Luaan Jan 03 '23 at 11:36
  • @Amon Mind, even in the real scenario, there is some value to letting the price grow. To some extent, increasing prices will drive the now limited supply to where it's most needed. What the cap is trying to prevent is mostly the ripple effects as the whole market adjusts. Which can be beneficial in a short term, and it's expected that increased profit margins will not accelerate the recovery in the long term; especially when you consider that the EU's policy for a long time now has been to reduce dependence on fossil fuels anyway. – Luaan Jan 03 '23 at 11:41
  • If the price of an essential and high demand product remains artificially low, demand will increase. The reason people panic buy is because they're afraid of future shortages primarily, not future prices. If they see prices are low they're just gonna buy more. Which is why shortages occur, because people can afford to buy as much as they want. That's why price caps at best have a very short term benefit, like you said. – Amon Jan 03 '23 at 14:18
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    There are shortages of food, particularly for such items as baby formula. How would you suggest reducing demand for food? – Boba Fit Jan 03 '23 at 17:43
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    @BobaFit "food" is not a commodity but rather a category comprising several commodities. When the overall supply of food is such that people cannot maintain their health even after adapting their diet to the available foods, a common solution in the last 80 years or so has been humanitarian aid. – phoog Jan 03 '23 at 19:31
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    @Arno Yes indeed, the "sweet spot." Real price caps have never been tried. The usual method of reducing demand for food then follows. https://en.wikipedia.org/wiki/Holodomor – Boba Fit Jan 03 '23 at 20:16
  • This line "strongly indicate that the current retail prices for those products are not just due to supply-issues" is strongly problematic. You can have supply issue while having satisfactory margin. The strong indication is that there is no margin issue, not no supply issue. – Argyll Jan 04 '23 at 17:49
  • @Luaan Because meat is so expensive, more farmers enter the meat market, buying more and more oats. It would be better - fewer starving people - if people would eat the oats directly. So maybe the shortage of meat is not so bad. – Reasonably Against Genocide Jan 04 '23 at 19:11
  • @BobaFit Demand has been successfully reduced by starving some babies to death. Economics is amoral. – Reasonably Against Genocide Jan 04 '23 at 19:12
  • You are aware that most of the babies do not need "baby formula". There is this thing called milk – Bartors Jan 05 '23 at 08:19
  • I feel like the "secondary issue" is the prime motivation in this case. – Bartors Jan 05 '23 at 08:20
  • Record profits don't negate supply issues. Imagine there are 6 suppliers of some commodity. One of the 6 has their factory/refinery/widget blow up. The 5 remaining suppliers can't meet the previous level of demand at the previous price so they raise price. Nothing happened to their ability to produce it simply isn't big enough to expand. The increase in price directly translates into their profit but it was still a result of a supply issue. – Dean MacGregor Jan 05 '23 at 11:10
  • I have no idea where all my comments went lol – Amon Jan 09 '23 at 19:50
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You may be confused by the economics definition of a "shortage", which is when "the quantity demanded exceeds the quantity supplied" which means people would like to spend more money and get more stuff, but they can't.

Note that "quantity demanded" means the amount that people will buy taking into account the price. As the price goes up, "quantity demanded" goes down. If food is expensive you don't want to spend all your money on food so you buy the smallest amount you can - and this is the "quantity demanded". If food is cheap you might want to buy lots and get fat. That is also the "quantity demanded". If food is very very expensive you demand zero of it and you die.

You can have a situation where food is expensive and some people simply do not have enough money to buy food, so they choose to go and lie down in a ditch and die. According to economics, this is not a shortage. They did not demand food (they weren't able to) so there is no mismatch between supply and demand, and no shortage.

You can also have a wartime ration type of situation, where everyone is fed, but just barely, and they would like more, but there isn't any, but at least they're not starving. According to economics, this is a shortage, even though everyone is getting fed. You might go to the shopkeeper and say "hey, I have more euros, please give me more bread" but the shopkeeper says "sorry you've already had your bread rations this week." That's a shortage.

Which situation is actually worse? Obviously, they are both bad, but the "shortage" is actually better because nobody dies of starvation.

If you are particularly left-wing-minded, you might notice that economics implicitly makes a whole lot of assumptions, when it defines that people who cannot buy something because it's too expensive do not count as demand. And you might realize these kinds of assumed definitions enforce a certain kind of economic thinking which perpetuates a certain kind of resource allocation in society. You might also notice that it's kind of weird (and similarly biased) that euros are considered as price, but ration cards aren't.

Reasonably Against Genocide
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  • "some people simply do not have enough money to buy food, so they choose to go and lie down in a ditch and die. According to economics, this is not a shortage." Actually it is: "a condition where the quantity of a product or service demanded is greater than the quantity supplied at the market price." Before those [poor] people die, there is shortage. Not after they die, sure. – the gods from engineering Mar 14 '24 at 18:41
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In addition to other answers:

First, "Economics 101" does not speak about times. If Hungary imports all of its oil through a single pipeline and the pipeline is shut, increasing prices will incentivate building a new pipeline, but it won't make it happen immediately. It could help make some previously uneconomical alternatives feasible (e.g. importing oil by truck) but only to a certain extent (where from? how many oil carrying trucks are available? Will they collapse the roads?)

A government might prefer to keep prices low, as rising them offers no real solution. If the situation worsens, the actual solution would be rationing.

Of course, high prices affect demand too, but it usually affects more the poor people and it is unpopular. This is why governments have tried reducing demand by other means (cheap public transport).

Also for a short spell, controlling the prices could be a valid solution. It would force the companies to sell their stocked oil, and while those last it could be useful.

And last but not least, the relationship between governments and big business may be complicated. Big business might have a lot of influence in government, but when the government sees a situation dangerous to itself, it does have its own tools, too. For example, it could be privately telling companies to suck up the losses (or more likely, the reduction of the extraordinary profits they have) in exchange of avoiding future tax raises or other possibilities that the government still has.

SJuan76
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    Why would price controls force the companies to sell their stocked oil? They could simply refuse to sell any until price controls end (hoarding). That strategy even works without price controls: keep your stuff in warehouses until prices rise, speculating that the increased profits after the price increase will offset the storage costs. – gerrit Jan 03 '23 at 07:55
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    @gerrit: Actually in Hungary for food with capped prices the grocery stores are obliged to hold as much of them in the selves as they used to have a year ago. In practice when I have to go to the third shop to buy sugar, it doesn't really work out... – user2414208 Jan 03 '23 at 09:29
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    @gerrit because it allows them to recover some of the cost of that oil. Oil in storage requires maintenance, goes bad... and it is not as, after keeping people without oil for a time, once the supply is recovered they will "compensate" for the time they were without (other than everybody needing to fill their tanks). If anything, if people do not have access to oil they may resort to alternatives (e.g. buy a bike) and consume less of it after supply is resumed. – SJuan76 Jan 03 '23 at 10:08
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    @gerrit In addition to what SJuan76 said, the point is that the company isn't going to wait for the price to go even higher - there's no expectation the price will rise even more if there's an actual cap. – Luaan Jan 03 '23 at 11:57
  • Certainly econ-101 speaks about time. Probably in the second lecture. What else are interest rates about? – Boba Fit Jan 03 '23 at 21:08
  • @BobaFit interest rates in Europe have been zero or negative for about a decade as the ECB printed almost unlimited amounts of currency to maintain them in this state. – Reasonably Against Genocide Jan 04 '23 at 17:42
  • @user253751 That is part of the point I was making. Who sets interest rates? – Boba Fit Jan 04 '23 at 18:23
  • @BobaFit please make the point then – Reasonably Against Genocide Jan 04 '23 at 18:32
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    @user2414208, of course it doesn't work out. The whole reason the prices went up in the first place is that those things are more scarce than the previous year. Price increases serve two purposes, to induce more supply AND to reduce demand. If there's a supply shock such that no more supply is possible then the only way to have supply and demand meet is for there to be less buying. This can be done with non-price rationing such as being the first in line, or explicit rationing coupons from the government. It can't be that someone just says the stores have to have a thing. – Dean MacGregor Jan 04 '23 at 19:47
  • @user2414208 so Hungary is hungry? – Reasonably Against Genocide Jan 05 '23 at 00:30
  • @DeanMacGregor Prices are not simply computed from scarcity through some algorithm. Sellers are free to raise prices as much as they like; rarely do they lower then unless forced; economics speaks about equilibria, average long-term prices, and it can't really relate prices and demand and supply and scarcity in the short term, which can be as irrational as anything. Economics can tell you Twitter should on average in the long term be worth about $7B (maybe) but it can't tell you why it was worth $44B at the exact moment Mr Musk bought it. – Reasonably Against Genocide Jan 05 '23 at 00:32
  • @DeanMacGregor but yes, it makes absolutely no sense for the government to just say stores must have something at a certain price, unless it chooses to become intimately familiar with the operation of those stores and works out how to make that possible. It can work in the very short term but not longer than that. "Forced availability" makes far far far less sense than manufacturing price controls, and/or rationing. Otherwise the government may as well just say stores are obligated to stock unicorns for $1 each and rainbows for $2. – Reasonably Against Genocide Jan 05 '23 at 00:34
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There is a multitude of reasons why politicians may argue for price caps:

Populism
Plain and simple: politicians want to be re-elected. Giving the impression of caring about common people is much more important for being re-elected than enacting legislation that actually helps people in the long run.

They do not understand or accept market mechanisms
This reason applies to many left-wing politicians who argue for price caps, be it rent, electricity or food. If one does not believe in basic economic principles or outright rejects them, it is easy to claim that the downsides do not exist or will not be as severe.

Consumer prices might not respect true cost increases
The uncertainty around energy supply lends itself to speculation. There is also no better time to increase prices for your products than when everyone else is increasing prices. An indicator for this can be seen in record high earnings for many sectors. Also, an uncertain situation and exploding prices in inelastic markets, such as energy and food, lend themselves to speculation. A price cap could help to contain speculation.

There are important details
Price caps can come in many forms. A good example of this is the price cap on natural gas agreed on by the EU. It definitely is a price cap, but the actual cap is relative to the price of LNG. The background is that there is only so much pipeline gas coming to Europe, and every government overbidding their neighbor to fill up their gas reservoirs for the next winter is helping no one. Another example of an attempt to keep some of the market forces while capping prices for consumers is the German price caps for natural gas and electricity. These will only apply to 80% of the previous year's usage, with the expectation that people will both switch to a cheap provider and try to save gas/electricity.

Manziel
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    +1 for populism. This is the primary reason that any politician considers price caps. Politicians support price caps because it makes it look like they're "doing something" to people who don't understand how economics work and it makes them more likely to be re-elected in the short term, even though it's usually bad for the population in the longer term. The goal of politicians is to stay in power. Not all means of doing so, even in a democracy, are actually helpful to the people, especially in the shorter term. – reirab Jan 03 '23 at 20:41
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    " every government overbidding their neighbor to fill up their gas reservoirs for the next winter is helping no one. " worse, it was helping the very country that Europe is currnently trying to punish for a certain "special military operation". – Peter Green Jan 04 '23 at 15:11
  • @PeterGreen I didn't think Europe was trying to punish the USA (where it is buying lots of overpriced gas from) for its wars in Yemen and Palestine? – Reasonably Against Genocide Jan 04 '23 at 17:49
  • Pushing up the price of pipeline gas means more money for russia. – Peter Green Jan 04 '23 at 17:51
  • @PeterGreen I thought Europe had contracts for a fixed price and probably also fixed quantity, which Russia broke. – Reasonably Against Genocide Jan 05 '23 at 00:35
  • @user253751 it is not known if any contracts were broken as these were never made public; we merely conclude that from the fact that Gazprom is making all sorts of implausible claims to justify not delivering. However, Russia is still selling gas to some EU countries, and they were making more money from that than from larger peace-time quantities - the "price cap" actually does not cap the price, but they forbid services for oil&gas sold at higher prices, e.g. making it harder or impossible to insure such oil transports. – toolforger Jan 05 '23 at 11:42
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In general, if applying first-order Econ 101 principles would suggest that a policy is a bad idea, the policy should be presumed to be a bad idea unless there are particular reasons to expect other more complicated principles to dominate. Here, however, it's not hard to name a couple of second-order factors that might dominate.

Hoarding and bubble speculation are a common second-order effects in which rising prices cause demand to increase rather than decrease. While price caps may or may not be effective at discouraging hoarding directly, they can certainly discourage bubble speculation by reducing plausible upside gains. If prices are rising, and one might hope to buy some quantity of energy for $100 and sell it for $200 (accepting the risk that after buying for $100, ine might end up having to sell for less), having a price cap of $120 would make such a proposition much less attractive, and thus reduce the amount of energy acquired in time of crisis by people hoping to profit from resale in time of deeper crisis. That in turn may free up enough supply to avoid triggering a hoarding cycle.

supercat
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    That's assuming most people are buying to resell. In reality most people are buying out of need, and if that product is cheap (because of a cap), people buy in hoards, which just offsets the people who would buy for reselling (who can still buy those cheap products in hoards). The basic econ applies either way. The actual best way I believe is when individual stores place buying limits on items (this isn't perfect, people can come in with their friends/family) – Amon Jan 02 '23 at 19:06
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    @Amon: The aformentioned second-order effects sometimes play a big role in markets sometimes a slight role, and sometimes no appreciable role. Price caps are often a bad idea, and may well be a bad idea in this case, but--contrary to what Econ 101 would predit--they're not always a bad idea. If many people have bought energy assets on speculation, they way want to hold off on selling them until prices peak. Using a cap to force a market peak may cause holders of such assets to liquidate them, thus freeing up the associated resources. – supercat Jan 02 '23 at 19:13
  • You're right, but that's all basic econ 101 as well. No one really mentioned "first-order" effects in the question. Yea it may force some people to sell, to other people who will hoard themselves, then supply drops more, and the cycle continues. Because thats what happens when something is in high demand and low supply and it essential, remember toilet paper and covid? toilet paper wasnt even any cheaper than usual lol. – Amon Jan 02 '23 at 19:20
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    @Amon: A full-semester Econ 101 course should cover hoarding and bubble speculation, but I don't know what phrase to use other than "Econ 101" to refer to the most basic rudiments of supply and demand curves. Most policies that wouldn't be justifiable given those alone aren't justifiable. As for "first-order" versus "second-order", the issue has to do with people responding to a situation at the time it exists, versus people reacting today to situations they think will exist in future. Supply/demand principles would suggest that rising prices should discourage demand, but... – supercat Jan 02 '23 at 19:45
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    ...there are situations were rising prices stimulate it instead because people who see prices rise today may expect those prices to rise more tomorrow, and react to such expectation. If governments can convince people that goods will be available at good prices tomororw, that may discourage such adverse reactions and thus become a self-fulfilling prophesy. I don't know anything specific about the current situation in Europe, but to know whether price caps are a good idea in a particular situation would require at minimum identifying whether any second-order effects are playing a role. – supercat Jan 02 '23 at 19:49
  • Ah I see, fair enough. I would say rising prices increase demand for speculation for sure. But for non-speculators i'd say it would have the opposite. But when tomorrow comes and supply is lower because prices were good yesterday, we're at the same spot – Amon Jan 02 '23 at 19:50
  • @Amon: Expectations of rising prices can also trigger people to buy things sooner than they otherwise would, which may accelerate rising prices, accelerating early purchases, etc. My main point, which I hadn't seen adequately covered in the other answer, is that the original's question was referring to principles that should generally be expected to hold unless dominated by identifable opposing factors, and to give examples of opposing factors that may sometimes dominate. – supercat Jan 02 '23 at 19:57
  • Expectations of a price cap can also trigger speculators to just buy even more in large amounts (because its cheaper), because they know eventually supply will run out. There's no way around this really, I think it's just a short delay. I don't really think bubbles and hoarding are opposing factors, they follow the same rules, just in a more complex way. Like how the example you just gave resulted in lower supply and therefore higher prices – Amon Jan 02 '23 at 20:02
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    @Amon: Price caps are best in situations where they are announced in advance and discourage prices from reaching the cap, and can be very destructive if they are set at a level below the minimum point to which the supply and demand curves can adapt themselves. I like to view an economy as something like a ball rolling around a shifting textured landscape. In situations where a ball could get caught in either of two low regions, one of which is more desirable than others, a price ceiling may prevent the ball from falling into the bad one. Although it's all too common... – supercat Jan 02 '23 at 20:10
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    ...for the "ball" to get trapped between the a rising landscape and the ceiling, that doesn't mean there aren't times when the ceiling causes the ball to end up in a better spot than it otherwise would have. – supercat Jan 02 '23 at 20:11
  • That's a good analogy, problem is with price caps they seem to inherently be used when there's no time for planning – Amon Jan 02 '23 at 20:25
  • @Amon note that's true if there is some fundamental restriction in supply and not just a temporary increase in speculative demand. It also assumes there is no rationing. I will not put it past Europe to (quite rationally) institute rationing if things get that bad. – Reasonably Against Genocide Jan 02 '23 at 20:47
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    @supercat Price caps are best in situations where they are announced in advance and discourage prices from reaching the cap I'm not sure how this is supposed to work, it seems to me price caps do the opposite, they encourage the price to always sit right at the maximum. I've seen this happen in cases as big as gasoline price caps (where the price actually jumped to the cap) and in cases as small as how much the government allows third party to charge in fees, which always seem to be exactly at the maximum of what is allowed. – Andy Jan 02 '23 at 21:32
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    @Andy I've also seen plenty of companies who keep raising the fees very fast. If they're going to approach today's cap in 2 years and then keep growing (for no reason) then maybe having them immediately jump up to today's cap and stay there is a win – Reasonably Against Genocide Jan 03 '23 at 01:51
  • @Andy That's definitely also a thing that happens, yes. The price cap effectively acts as a measure of what the government feels is acceptable, and companies are keen on setting that up - but again, it's not necessarily a bad thing, because remember that those companies will have to shoulder the losses when the costs rise further. Especially when considering things like gas, which are often supplied not at market prices, but actually agreed upon in advance for a year or more. – Luaan Jan 03 '23 at 12:06
  • Price caps incentivize hoarding. Free markets discourage it (because the price rises, which makes hoarding more costly.) Holding prices below market rates makes hoarding more viable, not less. – reirab Jan 03 '23 at 20:36
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    @reirab: Have I not made it adequately clear that price caps are generally a bad thing? Bubble-induced demand can in turn induce hoarding, and because price caps may serve to prevent bubbles, they may also prevent hoarding that would have been triggered by bubble-induced demand. – supercat Jan 03 '23 at 21:07
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The reason that econ-101 type reasoning does not give the right answer is because the conditions for it applying do not obtain. This is a fact that has been well known since at least Hayek's Road to Serfdom.

Governments like price controls because they regard their success or failure on a very different basis to what ordinary people do. Governments do not particularly care about shortages. Governments care about what they believe will keep them in power, what will give them more power, what will extend their control over more parts of society. Thus the primary feature of price controls that a government will be concerned about, the metric by which their success will be judged, is compliance.

Prices are signals of information. They indicate the degree to which people desire things relative to other things. Governments desire things that are quite distinct to what run-of-the-mill people desire.

People desire such things as food, shelter (including heat, light, water, etc.), clothing, medicine, transport, etc. These are things that keep people alive and healthy. People who are not so motivated do not live long.

Governments primarily desire to stay in power. Governments that are not so motivated do not stay around very long.

Thus, price caps may meet the desires of the current government, while cruelly disadvantaging ordinary people. Indeed, it is the usual expectable situation.

Price caps on fuel, for example, can be held up as "doing something to help the people." They can also be used as leverage on various individuals in order to wield additional power. Oil companies have huge wealth and so potentially have political influence. A chance to manipulate them with the threat of price caps gives the government additional levers of power. Nice oil company you've got there. Shame if the price of oil were half. But do us this favor and we'll let you keep 90% of the current price. For now.

The favors from the oil companies can be traded with other sociological entities for favors from them. The transit worker's union can be manipulated by agreeing to make driving private cars more expensive, thus pushing more people onto the subways. The agricultural sector can be manipulated by lowering the price of fertilizer (which is heavily affected by the price of fuel). Or at least not raising it as much as anticipated. The building and trades unions can be manipulated with promises of caps on the price of houses (affected by the price of fuel) to supposedly stimulate the house building market. And so on.

Thus we see price controls implemented again and again. And when government A is tossed out to be replaced by government Not-A, why the new rascals ask if they can borrow the notes from the previous rascals. Because the new rascals want to implement the policies that only last week they were shouting about being the most evil and ill considered nonsense.

This is by no means new. For example, in the late 1970s it was the case in Canada. The Liberal govt brought in price controls to "fight inflation." Then they lost an election and the Conservatives were elected. Who immediately implemented virtually identical price controls. Which managed to make things worse.

And so the price controls on fuel require price controls on housing and transport. Which require controls on wages in trades. Which require controls on the next aspect of society and the next and the next.

Hayek told us all of this quite clearly almost 80 years ago.

At some point, one expects that the following motto will be heard: Real price caps have never been tried.

Boba Fit
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    "Governments care about what they believe will keep them in power, what will give them more power, what will extend their control over more parts of society" - and what will keep them in power is making life better for ordinary people. Why would ordinary people re-elect a government that keeps making their lives worse? – Reasonably Against Genocide Jan 04 '23 at 17:51
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    That's a pertinent question. Why do you think people keep voting for governments that do things that are drastically and obviously bad for them? – Boba Fit Jan 04 '23 at 18:21
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    @user253751 To answer your question in the context of the broader question, when people can't find the thing they want to buy, they don't blame it on the price cap, they blame it on the producer. Even if the thing that makes life harder for people is the direct result of a government policy, it only hurts the politicians if the people recognize that fact. – Dean MacGregor Jan 04 '23 at 19:34
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In this particular case the true reason is that...

Talk is cheap

Intervention to achieve price reductions on basic foodstuffs is gaining political momentum as calls for uniform national measures to counter increasing inflation gain steam.

This could be realised either with a reduction of the value-added tax (VAT) or a price cap, according to the social democratic Mayor and Governor of Vienna Michael Ludwig.

...

The Viennese mayor also recommends a partial cap on electricity bills, as proposed by Gabriel Felbermayr, head of the Economic Research Institute (WIFO).

The mayor doesn't have the power to either reduce VAT or introduce a price cap on anything. Nor does the city council have such powers. Only the Austrian Parliament could introduce such a drastic measure, so the mayor can talk all day about how price caps are necessary without being forced to do something about it. Same applies to members of the opposition - they very much enjoy coming up with wild unworkable ideas, knowing all too well they don't have the votes to put them into practice.

If I'm wrong and members of the Austrian ruling coalition likewise support a price cap on basic foodstuffs, you can refer to other answers for a better rationale. But the mayor's words could be safely ignored as they're just empty talk.

JonathanReez
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    Please note that this mayor is head of one of the constituent states of Austria, not a mere municipality. That said, this is still mostly just applying pressure on the federal government, which may have similar plans in any case. – Chieron Jan 03 '23 at 22:56
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In the long run price capping does lead to a shortage because supply is reduced. However, in the short term it mostly reduces the profits of producers who are often unable to reduce or stop production instantly.

E.g. if you're a baker, you most likely have a stock of ingredients (or long-term contracts to get them shipped), as well as expensive assets such as bread ovens. If a price cap on bread is introduced which takes away all your profits, you will eventually go out of business. However, it will still be reasonable for you to keep baking bread at until your flour stock runs out, if you can only sell flour at a bigger loss than selling bread with the cap. And if there's an expectation that the price cap will be lifted soon, you won't sell your ovens for scrap metal right away. You may even have to keep baking bread just to keep ovens in a working state, in order to stay in business and get extra profits once the cap is lifted.

Especially with energy industry making record profits due to the ongoing crisis, price capping make more sense than subsidies to consumers which would boost those profits even more while making inflation worse.

Dmitry Grigoryev
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    At least in Hungary there's price cap on (some very specific) food, so it's not just about fuel. Given that the Hungarian food price inflation is the highest in the EU, I'd say it backfired spectacularly. First of all, the cap is only on some specific articles, so the shops raise the prices of everything else to compensate for their losses. The grocery stores were also hit by some extra tax, so they increased their prices even more to cover that tax. – user2414208 Jan 03 '23 at 09:37
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    Also the price caps are handled arbitrary (e.g. the removal of the fuel price cap was announced less than 30 minutes(!) before they were abolished at 23:00), so there's a certain amount of uncertainty, anything can be capped any time at any price - and the grocery stores increase their prices to cover this uncertainty. – user2414208 Jan 03 '23 at 09:40
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    @user2414208 I'm absolutely not saying that one can't have a spectacular economic failure with ill-designed price caps, just that well-thought price caps could be useful sometimes. – Dmitry Grigoryev Jan 03 '23 at 10:12