Non-Equilibrium Price Theory – the Case of Price Ceilings

A couple of weeks ago when I was presenting my version of the Austrian Business Cycle Theory at the Prague Conference on Political Economy, one of the conference participants asked me the question whether I am myself actually tacitly using an equilibrium-based price theory in my theorizing. I told him that such a theory is not necessary for ABCT but I did not have time to go any further into the matter.

In this post I will try to demonstrate the possibility of such a theory on the example of price ceilings.

1)      Suppose that there is an ongoing market process where, among other goods, consumers buy good X for money.

2)      Suppose that a celling is imposed on the price per unit of good X that is below at least some prices that would have been paid in the market for certain quantities of good X without the price ceiling (default scenario).

3)      Suppose that the preferences of the buyers and sellers with respect to money and good X are not affected by the imposition of the price ceiling compared to the default scenario.

4)      An opportunity for trade in relation to good X is a state of affairs in which at least one seller and one buyer will exchange a certain quantity of good X if they are not physically prevented from doing it.

5)      There will tend to be more foregone opportunities for trade with the price ceiling than without it (from 1-4).

One of the reasons why the conclusion is only about the tendency is because it is conceivable that the prices which would have been established in the default scenario would have sufficiently exceeded the reserve prices of the sellers to make them still willing to enter into transactions over the same amounts of good X even in presence of the price ceiling.

Notice that in order to make this argument I did not need to assume the clearing of the market in the default scenario, let alone the clearing of the market at a single price per unit of good X. The assumption that the preferences of the buyers and sellers with respect to money and good X will not be affected by the imposition of the price ceiling looks quite realistic.

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