Friday, February 12, 2010

The Problems with Price Floors

The Financial Times reported that China was facing electricity shortages in 2008. Were the shortages due to too little electric generating plants? No. Was there a natural disaster that crippled the Chinese electric generating/distribution/transmission system? No. Then why would a nation have electricity shortages? Price floors!

China has imposed maximum prices for electricity. Yet, world coal prices were increasing substantially during this time period, so electric generating firms were losing significant amounts of money, and thus had to reduce the amount of electricity produced, which will cause a shortage.

No comments: