Do government interventions always lead to lower prices? Why or why not?

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There is an active ongoing debate between economists as to how much intervention by the government ultimately leads to lower prices in the American economy. Historical evidence suggests that government intervention more often than not paves the road to higher prices for consumers and shortages for some critical commodities. There are examples of government intervention that artificially keeps costs low: for example, regulation of electricity.

Electricity is highly regulated, and in some states, utilities have to appear before a board before rates are raised. The government sets consumer rates that the utility can charge and, in some states, guarantees a fixed return on investment to the utility. The evidence also suggests that the lack of competition in the production of electrical energy has forced suppliers to neglect critical maintenance (California is an example). Some economists suggest that the lack of competition and guarantee of a profit stymies innovation. There is little or no incentive for energy companies to begin to search for alternative sources, such as clean energy. Other economists point to the success that deregulation has on the natural gas industry, which is booming, though some of the credit for the boom goes to new technology.

A better example of how government intervention is a short-term solution and leads to eventual higher prices for consumers is the price controls implemented by President Nixon in August of 1971. President Nixon ordered a freeze on all price and wage increases in the United States even though the economy was relatively flat—not recessionary or in rapid expansion. Wildly popular with the public who were led to believe price controls would keep inflation at bay and prices low, the economic advantages were short-lived, as producers began producing less. Wages did not rise and became stagnant. In the agricultural sector, farmers quit producing, creating shortages in some parts of the country as the price fell below the cost of production.

Another example is the effort to place rent controls on residential properties by state or local governments. The idea seems sound but creates havoc in the residential housing market. If government price controls limit rent increases, the general theory is that there will then be more affordable housing on the market. The evidence suggests that the opposite is true. It is no coincidence the cities with rent controls have the most significant shortage of affordable housing. Consumers find ways to circumvent the rent controls, and the availability of affordable housing continues to decrease.

What do consumers see in healthcare and prescription drug prices? Healthcare is one of the most highly regulated industries in America. Yet prices continue to outpace inflation.The government accounts for nearly fifty percent of the total healthcare spending in the United States. While many other factors drive healthcare costs, the government's plan to reduce prescription drug prices is not working. The effort to control costs has shifted much of the burden of paying for healthcare to consumers, in the form of higher deductibles, higher out-of-pocket expenses, and higher premiums.

There are many other examples of situations where government intervention creates additional financial burdens on average consumers. To be fair, there are many examples of situations where government intervention may have helped to avoid economic disaster. Many economists will point to the cases of the success of government intervention in saving the American economy. For example, Roosevelt's New Deal is credited with getting Americans out of the Great Depression. President Bush and President Obama's injection of billions of dollars into the economy during the mortgage crisis and economic collapse of the financial industry is credited by many economists as having avoided a severe economic depression similar to the one President Roosevelt faced. There are other historical examples as well, but these two are notable, as economists generally agree on the necessity of government stimulus in the face of economic calamity. Yet, the evidence suggests any pricing decreases were from the lack of demand and not necessarily attributable to government intervention in the form of economic stimulus.

The government can and does intervene in the economy indirectly through several regulatory agencies and directly through annual spending in the federal budget. All have some impact on the pricing of products and services to consumers. Taken in whole, government intervention in the economy seldom leads to long-term reductions in consumer prices. Consumers, innovation, technology, and competition consistently result in lower costs for consumers by comparison with government efforts. However, several economists will dispute this conclusion, and there is historical evidence suggesting their position merits consideration.

Last Updated by eNotes Editorial on
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