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That is not so when an artificial distortion intervenes. With a 50 percent tax based on selling price, an item
that costs $1,50 to the buyer is worth only $1,00 to the seller. The tax creates a wedge, mentioned earlier, be-
tween the value to the buyer and the return to the seller. The anomaly thus created could be eliminated if the
distortion were removed; then the market would find its equilibrium at some price in between (say, $1,.20)
where the product's worth would be the same to buyers and to sellers. Whenever we start with a distortion, we
can usually assert that society as a whole can benefit from its removal. This is epitomized by the fact that buy-
ers gain as they get extra units at less than $1.50, while sellers gain as they get to sell extra units at more than
$1,00.
Many different distortions can create similar anomalies. If cotton is subsidized, the price that farmers get
will exceed, by the amount of the subsidy, the value to consumers. Society thus stands to gain by eliminating
the subsidy and moving to a price that is the same for both buyers and sellers. If price controls keep bread (or
anything else) artificially cheap, the predictable result is that less will be supplied than is demanded. Nine times
out of ten, the excess demand will end up being reflected in a gray or black market, whose existence is probably
the clearest evidence that the official price is artificially low. In turn, economists are nearly always right when
they predict that pushing prices down via price controls will end up reducing the market supply and generating
black market prices not only well above the official price, but also above the market price that would prevail in
the absence of controls.
Official prices that are too high also produce curious results. In the thirties the United States adopted so-
called parity prices for the major grains and a few other farm products. Basically, if the market price was below
the parity price, the government would pay farmers the difference or buy any unsold crops at the parity price.
The predictable result was production in excess of demand-leading to surpluses that were bought up (and idly
stored) by the government. Then, in an effort to eliminate the purchase of surpluses (but without reducing the
parity price), the government instituted acreage controls under which it paid farmers to take land out of produc-
tion. Some people were surprised to see that a 20 percent cut in wheat acreage did not lead to a 20 percent fall
in the production of wheat. The reason was that other factors of production could be (and were) used more in-
tensively, with the result that in order to get a 20 percent cut in wheat, acreage "had to" be cut by 30 to 40 per-
cent.
Economists have a better solution. Had the government given wheat farmers coupons, each of which per-
mitted the farmer to market one bushel of wheat, wheat marketings could have been cut by the desired amount.
Production inefficiencies could be avoided by allowing the farmers to buy and sell coupons among themselves.
Low-cost farmers would buy coupons from high-cost farmers, thus ensuring efficient production. This is known
as a "second-best" solution to a policy problem. It is second rather than first best because consumers would still
be paying the artificially high parity price for wheat.
Monopoly represents the artificial restriction of production by an entity having sufficient "market power"
to do so. The economics of monopoly are most easily seen by thinking of a "monopoly markup" as a privately
imposed, privately collected tax. This was, in fact, a reality not too many centuries ago when feudal rulers
sometimes endowed their favorites with monopoly rights over certain products. The recipients need not ever
"produce" such products themselves. They could contract with other firms to produce the good at low prices
and then charge consumers what the traffic would bear (so as to maximize monopoly profit). The differences
between these two prices is the "monopoly markup," which functions like a tax. In this example it is clear that
the true beneficiary of monopoly power is the one who exercises it; both producers and consumers end up los-
ing.
Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant
monopolies, they usually grant them to the producers. Second, some monopolies just happen without govern-
ment creating them, although these are often short-lived. Either way, the proceeds of the monopoly markup (or
tax) are commingled with the return to capital of the monopoly firms. Similarly, labor monopoly is usually ex-
ercised by unions, which are able to charge a monopoly markup (or tax), which then becomes commingled with
the wages of their members. The true effect of labor monopoly on the competitive wage is seen by looking at
the nonunion segment of the economy. Here, wages end up lower, because the union wage causes fewer work-
ers to be hired in the unionized firms, leaving a larger labor supply (and a consequent lower wage) in the non-
union segment.
A final example of what occurs with official prices that are too high is the phenomenon of "rent-seeking."
Rent-seeking occurs when someone enters a business to earn a profit that the government has tried to make un-
usually high. A simple example is a city that imposes a high official meter rate for taxis but allows free entry
into the taxi business. The fare must cover the cost of paying a driver plus a market rate of return on the capital
costs involved. Labor and capital will flow into the cab industry until each ends up getting its expected, normal
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