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Tags: airlines | fees | hotels

Regulatory Pricing Can Actually Reinforce Markets

government financial regulation of prices and pricing


Paul F. deLespinasse By Tuesday, 23 April 2019 12:17 PM EDT Current | Bio | Archive

When asked how much yacht maintenance costs , J.P. Morgan supposedly replied, "If you have to ask how much, you can't afford it."

Most of us, though, can't afford not to ask how much things cost.

Sometimes, government can and should help us find out.

Government generally should not dictate prices charged by private organizations.

Competition among producers protects consumers from being overcharged.

Prices arbitrarily set by government may unbalance markets, creating shortages or surpluses. But when government restricts or prohibits competition by conferring patents or giving utilities a local monopoly, regulated prices may be necessary to protect consumers.

Even when competitors vie for our business, some price regulations actually help markets work more efficiently and don't prevent them from balancing supply and demand. These legitimate regulations don't dictate prices but merely require complete honesty in telling possible customers what those prices will be.

In 1970 I encountered an incompletely disclosed price when reserving an apartment for my sabbatical year at the Harvard Law School. Unaware of a question I should have asked, I believed the landlord when he told me the monthly rent, paid a deposit and returned home to Michigan.

The landlord said the leases weren't ready but he would send one.

The lease came that summer while I was visiting in Oregon. It included a provision the landlord hadn't mentioned: if his building's taxes increased I must pay 4% of the total increase (for his 32 units) on top of my rent.

The landlord presumably would have refunded my deposit if I backed out. But returning 3000 miles to Cambridge to find a replacement would cost more than any extra rent. And nothing else might be available. I signed, mentally consigning the villainous owner to landlord hell.

He later billed me an extra hundred dollars ($655 in 2019 dollars.) When he put a lien on our checking account, we capitulated and paid him. Suing him would have cost more.

Although this was an extreme case, dishonestly disclosed prices are all too common. Before federal regulations prohibited this, airlines did not disclose all the applicable "fees" and taxes when they advertised fares.

Hotels often quote rates without mentioning how much tax will be added. Some also slap on undisclosed mandatory "resort" fees. Auto rental companies, telephone, and internet service providers often play the same game.

Perhaps the most outrageous problems are in the medical world. Just try to find out what it will cost to deliver a baby, have a CAT scan, or get a new hip! Procedures can cost ten times as much at one hospital as at other, equally good hospitals. Medical charges are often treated as corporate secrets.

If we can't shop around, competition won't protect us from being seriously overcharged.

In many respects pharmaceutical companies and medical providers are monopolies or the equivalent of monopolies. A strong case can be made that their prices should be regulated as if they are public utilities.

Legislation should at least require full disclosure of what medical services will cost.

Unlike governmental determination of how much can be charged, this wouldn't undermine the functioning of economic markets and would actually enable them to work.

But why apply such legislation only to the costs of medical services?

Ideally, law should require that all prices for goods and services be disclosed fully and in advance. Perhaps the legal punishment should be that sellers must accept as payment in full the price they quoted in advance to the buyer, no matter how many taxes or fees it "forgot" to mention.

If this rule had been in effect in 1971, it would have put our Cambridge landlord in his place!

Paul F. deLespinasse is Professor Emeritus of Political Science and Computer Science at Adrian College. He received his Ph.D. from Johns Hopkins University in 1966, and has been a National Merit Scholar, an NDEA Fellow, a Woodrow Wilson Fellow, and a Fellow in Law and Political Science at the Harvard Law School. His college textbook, "Thinking About Politics: American Government in Associational Perspective," was published in 1981 and his most recent book is "Beyond Capitalism: A Classless Society With (Mostly) Free Markets." His columns have appeared in newspapers in Michigan, Oregon, and a number of other states. To read more of his reports — Click Here Now.

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Even when competitors vie for our business, some price regulations actually help markets work more efficiently and don't prevent them from balancing supply and demand.
airlines, fees, hotels
Tuesday, 23 April 2019 12:17 PM
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