China Learning Price Controls Don't Work In A Market Economy

Politicians on both side of the aisle in Congress agree there should be some kind of national energy policy, with some calling for some kind of price controls, others for opening areas previously closed to oil exploration, and yet others pushing for more wind, solar, and nuclear power.

All may sound like a good idea, but at least one of them, price controls, is a bad idea that's been proven to be bad again and again throughout history. It's a lesson China is presently learning, finding that keeping the price of coal artificially low has that country suffering from the Law of Unintended Consequences.

Chinese power plants are running out of coal, with less than a three-day supply in some areas, the government said Tuesday, adding to China's logistical headaches following a devastating earthquake.

It is the second time in three months that Chinese power plants have run short of coal, an unintended effect of government-mandated price controls -- a throwback to communist central planning -- to shield the public from rising global energy costs.

As a commenter to the linked article stated, “We in the USA learned this lesson (most recently) back in the 1970's under Nixon's wage/price controls.” The Chinese are learning George Santayana's axiom about ignoring history is true.

Keeping the price of a commodity artificially low always fosters increased demand and reduced supply. It skews the normal feedback mechanisms inherent in a market economy, sometimes with devastating effects.

In China a number of coal-fired power plants have already shut down due to lack of fuel. It didn't help things that the government also froze the price of electricity, which put the power producers into a bind. As fuel prices have risen, despite government price controls, they haven't been able to pay the higher prices because the don't have enough funds to do so. It doesn't matter if the price of coal there is low, there's none to be had at that price. If the coal mines can't get enough money to pay the cost of mining and shipping the coal, they don't mine it. And if they don't mine it, there's none to ship. It's a cascade effect that is already moving through their economy and is likely to cause spreading power shortages as fuel becomes scarcer.

The price controls are also making themselves felt in the oil industry in China. Petroleum fuels are also becoming scarce even as demand is skyrocketing.

This is a lesson that we should take to heart and not be forced to learn yet again.