Why rent control does not work is not that difficult for one to really imagine and even me as a junior economist, I can figure out why this does not work. So let me get to this and see if I can explain why this does not work...

So let me start by taking this from an industrial organization aspect. Consider the landlord who owns a building and has renting ability in this building and then later I will relate this back to hyper-inflation and see where that takes me.

So our landlord rents and whatever price...let us makes this price 'p'...as usual. The quantity will be 'q' but that will not be much used. In a very basic sense, what happens is that the price/quantity game switches from a Bertrand game to a Cournot game. In this instance, it changes the game from a price comepitition game to a quantity competition game with a lower floor. Considering this within the mathematics of the game, this artifically increases the price and puts a upper squeeze on the market of multilevel distribution channels. Further it warps the market from a basic Cournot to an inverted Cournot.

The basic idea behind a Cournot game is that firms set an equillibrium price based on perfect competition and thus the price is set and the lowest possible price and the firms make zero profit...economic profit. This maximizes consumer surplus and minimizes producer surplus thus making it the best situtation for the consumer and at least somewhat benefitial for the producer.

When the market is free to do whatever is necessary, prices move freely across the market and by the dynamics of the game, it sets the most affordable price across the market. When the prices mediate on their own, the will waver and due to the competition, will set at a price that the majority of the population is willing to afford. This is a dynamic market that is free to move on its own and it will find an equilibrium price with out much effort.

The difference between that and a market with a price ceiling is that it artifically raises the cost of doing business in the first place. Consider this statement this way, if you were a "constructioneer" of a lower good used to make a widget and know you knew what the lowest amount that your upper buyer on the supply chain, what would you do under these circumstances? Under rational choice, granted somewhat sadistic, you are going to charge a price that minimizes the profits of the upper ends of the supply chain because now you have a base price to understand what kind of price they are going to get for the widgetette that you are making and thus can move to set a price higher then the equillibrium and putting the squeeze on the entire system above you and finally leading to a higher consumer price.

Under normal circumstances, each company along the supply chain sets a price that is maximized for their particular situation. If you knew what the upper end of the supply chain was going to make however, you could readily estimate what they were going to make and thusly take part of their profits...in essence, it is the reverse of the way franchisers set their market price. In the case of Wendy's, it is not wise to set the price such that you are taking all of the profits from the upper ends of the supply chain, but what you do instead is take a chunk of their profits, artifically lowering the profits of the upper ends of the market and forcing less consumer surplus. Relatively speaking, one could easily see this in either the wages or profits of the lower ends of the supply chain by either increased profits over the larger market average or increased wages over the larger market average and possibly both.

To look at this mathematically, all you have to do is to include into the maximization equation, the lower level costs on the supply chain and maximize for the same price and you will readily see that the price squeeze will happen and that is going to be mathematical proof of what I have stated. Normally under a perfect competition scenario, a stable solution to the maximization problem, by consider vector fields will lie at the lower portion of the supply chain. In this case, the profits are lower at the bottom of the market and they increase in a somewhat stable position over the market, considering equal market dominence over the entire profile. In the case of a price ceiling, this shifts the stable equillibrium of the market more towards the ceiling of the market. This would be seen by less consumer friendly choices by the last end owners of the goods and more "selfish" choices by the owners of the goods in order to recoup some of the lost profits. (I will consider the equillibrium solutions question later...this is a very intersting topic that I must revisit)

Futher consider this point...something I was just considering, under this scenario, it would really bring out what the difference between economic profits and actual profits are. Under a normal scenario, there should be a standard normal distribution of corportate entities in the market...considering size, but if when the economic profits are pressured then smaller corportations are going to go out of business as the owners of the corporations are pressured more and more by price squeezes...but I digress.

When the market is in a disequillibium, the stable solution to the equation shifts to a much different position. Under perfect competition scenarios, the stable solution to the equation is going to be at the bottom and the top of the domain of the equation and all other scenarios will lead to increasingly out of control situations. As long as the stable solutions stays inbetween the maximum and minimum of the two equations, this will lead to a stable solution, but what happens when it does not lie this area. For this scenario I am describing the best position to be in would be the "middle man" in the market with very little competition.

So how does this all relate to hyper inflation...Considering the economy under a equillibrium scenario, the market will have two stable solutions to it, one at the market price and the other at zero profits. Any deviations from this will lead to either chaos or to and unequal scenario for the markets. In the sense of hyper-inflation, the upper bound of th market will be bashed asunder. How will this happen, by the broad scale price ceiling. Why will this happen, instead of putting the wholesalers out of business and so for upward on the supply chain, the pain will be felt by the retailers and so forth down the supply chain. This puts the pressure on the retailers of goods to break from competitive means in order to stay as ongoing concerns.

Essentially, a price floor blows up the upper bound of the market and puts "more" profits to the middle men in the market and thus really causes chaos in the market. Instead of having a stable solution in the market, you now have an unstable solution at zero and no other. This used to be the bound between the profit seekers and the profit takers but now there is only one and the prices soar out of control.

So what do you do in the case of hyper-inflation. The answer is simple, what you are doing is wagering your future profits versus your current profits. When a country decides to "turn on the printing presses", what you are doing is wagering that your economy is going to recover to the point that you are going to live up to the amount that you are printing and your ability to recover that amount depends on your ability to grow your economy. By "printing money" you are betting that your economy can recoup what rate you are groing at.

This is exactly what is happening in the situation of price celings. As long as your businesses are growing at a rate that can handle for the individual the price increases, then you are safe and you are just squeezing part of the economy, but when the upper bounds are blown out, you have no shot. Essentially what I am saying is that price ceilings only work on the limited level that they are instituted within a confined environment and the implemented under a confined scenario.

In all other scenarios, everything blows up and prices rise along with everything else. So what is the answer to hyper-inflation...you leave the markets alone and they will correct themselves. Essentailly, where everthing lies is in the political pressure the the governing body feels, but the governing body was wrong in the first place for instituing such simplistic ideals as to control hyper-inflation. The only way this happens is that the countries "turn on the printing presses" instead of dealing with the actual economic issues and they "blow out" the upper boundary of the economy by such actions.

This is actually what happens in price ceiling scenarios, in relation though, it is a region action instead of a country wide situation. Essentially, what I am saying is that the upper boundary is decided by the monetary flow of the economy.

 

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