Price Controls at Work

In many states like California, auto insurance rates have been subject to state price controls for years.  A recent debate over a bill called AB 2840 helps shed some light on the total idiocy of trying to have government set prices.

I have to give you a paragraph of background.  Warning -- the next paragraph is mind-numbingly dull.  Please don't give up.

Apparently, auto insurance rates are higher in California cities in part because claims rates (theft, accidents) are higher in the cities.  The cities, which have a lot of political power, argued that this was unfair that their rates were so much higher than rural folks paid.  State-approved insurance rates were discriminating against cities, they claimed.  I don't know if they made the argument, but they could also have argued that infrastructure costs (sales, claims service) was likely lower in cities per capita because of the concentrated customer base.  So the state insurance board proposed to raise rural rates and cut city rates to make prices to all Californians more even.  Rural folks then freaked, and their legislators have proposed AB 2840 to put things back the way they were before.

So who is right?  How the hell am I supposed to know?  How the hell is anyone supposed to know?  There is absolutely no objective way to settle this argument.  I read the attached article and my eyes just started to blur.  That is why in practice, for all the talk of studies and analysis, issues like this are settled in favor of whoever has more political clout or votes.  Price controls, besides wreaking havoc on supply and demand, always - yes always - result in a transfer of wealth from those without political power to groups that have the power.   That's why politicians love them -- its a great way to raise campaign donations, as groups bid to be on the receiving end of such largess rather than being the sacrificial lamb.  And it's why in a free and just society we use this thing called "markets" to determine prices in most other such complex situations.

  • http://unrepentantindividual.com/ Brad Warbiany

    When you get into things like gas prices, at least people in favor of price controls have somewhat of an argument. You're dealing with scarcity of a physical good. As we all know, the argument is wrong, and leads to bad things, but there is at least some plausibility to the uninformed.

    Not so with insurance. There is no monopoly power involved. Insurance is highly fungible, and there are several willing providers throughout the state of California. To transfer insurance from one company to another basically takes a phone call or two. If there is a system in which a free market would be seen by just about everyone to work properly, this would be an ideal example.

    How exactly did California ever get into this mess?

  • http://www.ballotbrain.com/ BallotBrain

    Not only thefts and accidents, but insurance fraud, (deliberate collision, faked doctors claims) and litigation are much higher in California Cities.

  • Don Lloyd

    Brad,

    Not so with insurance. There is no monopoly power involved. Insurance is highly fungible, and there are several willing providers throughout the state of California. To transfer insurance from one company to another basically takes a phone call or two. If there is a system in which a free market would be seen by just about everyone to work properly, this would be an ideal example.

    I don't live in California, but I would be shocked if the auto insurance system can be accurately described as a free market. If you could demonstrate that the regulations governing it are no larger than a typical IRS publication, I might change my mind. Is the market for widgets free if they must all have a left-handed thread, be blue, and weigh 2 pounds? My expectation is that California auto insurance policies are virtually all the same with the same limited set of options, and true competition is not allowed.

    Regards, Don