Monday, January 18, 2016

Why the Government Wants You to Pay More for Your Groceries: Radical Distortions of Natural Market Forces

In mid-2015, Shandra Martinez reported about an ongoing legal action. A regional grocer, Meijer’s, was suspected of selling food at prices which the government deemed “too low.”

This seems, to say the least, counterintuitive, especially at a time when the national economy had been sluggish for several years. Is it such a bad thing for consumers to get a good deal on groceries?

To be sure, there have been well-intentioned arguments for minimum prices: to avoid, e.g., “dumping” by which a large retailer can drive smaller retailers out of the market, only to dramatically raise prices once the competition has been eliminated.

But if such a tactic ever worked, it would certainly not in a market as liquid and active as consumer groceries.

Yet the government practice of setting minimum prices for various retail items remains a widespread practice. Shandra Martinez writes:

Meijer's recent opening of two Wisconsin stores has led to a state investigation to determine if the Midwest retailer violated a Depression-era law that keeps products from being sold below cost.

Products reported to be priced too low range from 28-cents a pound bananas to a $1.99 gallon of milk.

From beverages to fuel, price controls set minimum prices for a wide range of products. When competition would drive prices lower, the government steps in to stop prices from dropping.

Arguments are made that this regulatory intervention protects various industries. If this were true, it would ironically be foreign industries receiving protection from American governments, because in many cases, the goods so regulated are imported.

The minimum prices, however, often fail to protect industries, and in fact prevent them from expanding. Lower prices would lead to increased production, higher employment, and more net income to the manufacturer.

Both from the perspective of common sense, and from the perspective of technical economics, government-mandated minimum prices for retail goods serve only to force the consumer to pay more. The practice of legislated minimum prices creates inefficiencies in which selected “crony” companies can generate abnormally high incomes enabled by government favoritism.

The removal of government price controls benefits consumers and producers alike, strengthening the overall economy.