The greatest argument against price control is that it leads to a distortion of the market. Yet, more often than not, we forget that like crack cocaine, we cannot easily wean off it.
Governments direct a price ceiling or a price floor to enforce control. Two examples show why it is a bad idea.
The United States entered World War II in 1942 and began a crash programme of shipbuilding, munitions, and arms manufacturing.
The Brooklyn Navy Yard, established in 1801 was already a preeminent war workshop. It was employing 18,000 workers in December 1941. Following the Pearl Harbor attack, the U.S. officially entered World War II and the number of employees at Brooklyn Navy Yard rose to 42,000.
This rapid demand for labour saw a mass exodus of people to New York. The migrants filled up available apartments in the city. Landlords soon assumed market power and began charging higher prices.
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To check this trend the city of New York enacted a wartime emergency measure, instituting rent controls. It set a cap on rent. It looked like a bright idea at the time but history shows why it was a poor decision.
How?
Adam Smith, a Scottish Enlightenment thinker introduced the concept of the ‘invisible hand’ – a metaphor for the unseen forces that move the free market economy, in his book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ published in 1776 and in ‘The Theory of Moral Sentiments’ published in 1759.
The invisible hand is part of laissez-faire, meaning the “let do/let go,” approach to the market. This means that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.
The New York rent cap violated this principle. You see, in a market, high price is an indicator of demand growth, and entrepreneurs are attracted to unsatisfied, effective demand as a moth to light.
This is where the lure of positive economic profits lies as high prices keep the market liquid. More supply force down prices helping to achieve an equilibrium.
High rent was a signal alerting investors of demand. The rent control removed the economic signal that buildings are in demand in New York, hence landlords had no incentive to build new apartments even though workers were still flocking to the city.
As they say, water has to find a level, hence other methods have to be developed to balance out this rule: hello “underground economy,” commonly called the “black market”.
The rent control rule led to sharp practices including the practice of sub-letting. People left their names on leases after moving and since apartments are scarce, raised the price for the new occupier while paying the landlord the rent-controlled rate.
Some landlords began the “key money,” scheme where they take “under-the-table” payments upfront to allow a person to move into a rent-controlled apartment. Landlords began to prefer high turnover thereby losing any motivation to spend money on maintenance.
And over a century after the war ended in 1945, New York is yet to completely shake-off rent control.
How is all this your business?
Now let’s come home. In the middle of the 1980s, Nigeria ignored counsel from multilateral organisations and began to set petrol prices in response to adverse economic conditions and frequent world oil price fluctuations.
Yes, it seemed like a bright idea at the time. We must protect our people from the vagaries of the international crude oil market, politicians said. Why should Nigerians produce oil and not benefit from it, civil rights advocates chirruped?
And successive governments kept the practice ignoring the economic implications.
Just like the New York example, subsidies have distorted the petroleum products downstream market, created conditions for sharp practices, and led to a waste of resources that should be applied to other sectors of the economy. Worse still, it has been difficult to kick the habit.
Nigeria’s subsidised petrol is distorting price mechanism in the West African sub-region. Many people in Niger, Benin Republic, and Cameroun prefer to buy cheap, smuggled petrol from Nigeria sold in containers than at the market price in the country. It is often corrupted to amass profit.
On roadsides in Cameroun and other West African countries, vendors fill customers’ cars, using the cut-off top of a plastic bottle as a funnel. The fuel is significantly cheaper than is sold at gas stations because it is smuggled fuel from Nigeria.
Petrol smuggled from Nigeria is known as “Funge” or “Zoa Zoa”, in Cameroon’s North West region.
Now Cameroon is one of Africa’s biggest oil-producers racking up over 90,000 productions per day. It exports around 43 percent and refines the rest for local consumption. Nigeria’s cheap oil is a pain.
