When government power is used to control price as a way of reducing the cost of various goods and service they are creating shortages. A classic example of controlling prices without controlling costs was the electricity crisis of Californina, 2001-2002. The cost of generating electricity used by California rose for a number of reasons, one being, a year of reduced rainfall and reduced water flow through hydroelectric dams and less electricity production. The cost of electricity of running the generators did not decrease the cost of generating the electricity increased. Electricity from natural gas was rising, so cost of electricity generation from those means increased. Normally, rising costs means rising price, but California politicians imposed legal limits on how high electricity prices would be permitted to rise. The companies generating the electricity passed on cost to the public utilities that distributed the electricity, to the public. The wholesale price was 15 cents per kilowatt and the retail price was 7 cents per kilowatt. “the wholesale prices signaled that electricity was increasingly scarce, but retail prices told consumers that nothing had changed.” Blackouts were the inevitable results. The California public utility company went broke. The public companies lacked money and credit with the wholesalers. The governor used state money to buy electricity. In the end Californians paid more for their electricity: billing problems, higher taxes, and depleted surpluses. The rescue attempt was a failure.[Learn More ...]

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