As someone that works in Alberta’s oil and gas exploration industry that was just notified his company is pulling out of Canada before the end of 2020, I can understand how government bailouts and price controls are initially appealing to many. However, both price controls and bailouts significantly distort markets, causing all of us unnecessary pain.
WHAT’S WRONG WITH GOVERNMENT BAILOUTS?
Much more importantly bailouts encourage companies to take risks or fail to plan for the future so they can make higher profits today knowing that the Government will bail them out and take the loses. Economists call this Privatizing Profits And Socializing Losses . Do you remember the 2008 financial crisis. When financial institutions like investment banks made insanely risky loans so they could artificially jack up profits and when it all came crashing down “we” paid for it through our taxes given to these companies as bailouts.
The notable exception to a no-bailout rule, occurs when companies are hit with a crushing environment they could not have reasonable foreseen. For instance, it COULD be argued that airlines should be bailed out of the COVID19 crisis with tax payer funds because it is not reasonable to expect airlines to financially plan for a complete global shutdown of their industry. In this case it COULD be argued that it is in the collective societies interest that we all pitch in our personal dollars (via the Government) to help companies like WestJet, KLM and Delta Airlines.
WHAT’S WRONG WITH GOVERNMENT MANDATED PRICE CONTROLS?
Similarly, price controls have had a very poor track record. The basic problem with price controls is that the supply of products or services with such controls decline because no-one wants to enter a market where they cannot set the price. In fact, it is much worse than just not having new entrants to the market; price controls cause existing providers to exit the market, thereby reducing the supply of a presumably critical product or service (like rental properties).
The notable exception to a no price (and/or wage) control rule, is to handle a short term shock to the market. In that situation, such controls can be helpful in keeping markets stable and functional, but it is absolutely critical that the controls be as loose as possible and as short term as possible, or they will cause permanent damage to both you and I.
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