Cars lining up to fill their gas tank during the 1970s gas shortage in the US
Recently, I have heard that there is a short-term price cap (in economic term: "Price Ceiling") on gasoline in Cambodia. Now, since this only lasts until, I believe, 21st of June, it should not be much of a concern.
Why should it be a concern otherwise? Because a long-term practice of limiting maximum price is bad, at least that's what both economics and history tell us.
To illustrate, I'll pass on to you one of my favorite examples. In the 1970s, the US was struck by a severe shortage of gasoline. The amount of gasoline available, however, did not vary that much from the previous year. Neither did the number of vehicles. So, what caused the shortage despite not having actual physical insufficiency? This is clearly a question that demands an economic answer.
Remember that people are mostly driven by their own self-interest. Yes, that is not always true, but it still applies to a majority (it is true on average). With the economic miscalculation by the government, a false incentive can emerge as an unintended consequence. The US government back then set a price ceiling (i.e. set an upper bound so that the price could not exceed a certain threshold). That is to say, regardless of the increase in demand, price cannot rise above the upper limit set by the government.
With low and constant gas price despite being in high demand, people could consume much more gasoline without having to be thrifty. The consumption got higher and higher, and since price did not rise, there was no signal given to the public, no incentive to cut back on the consumption. Eventually, they ended up with a long line of vehicles waiting to fill up their tanks, and as getting gasoline gradually became a tedious time-consuming task, another problem occurred which was "Hoarding".
People started to fill up their tanks to the fullest every single time they could. They feared the idea of having to drive around all day trying to find a gas station with available gasoline or waiting with many others in a long queue of cars with no guarantee of having your tank filled. The gas stations could not amass enough supply for the whole day (and had no incentive to do so since they could not charge more for their effort), so they only operated for a few hours and they closed way too early. That worsened the shortage, and people hoarded more. With more and more gasoline in individual gas tank instead of the general inventory of the gas station, it was impossible to reallocate the excess amount to the other locations with greater economic, social, and scientific activities (where most goods, services, innovations, and knowledge materials are produced). Growth stagnated. This is how much economic and social damages a bad policy can cause you and your country.
In the case of Cambodia, this would probably also lead to worse traffic congestion. It would also contribute to more pollution and rising level of stress. At the same time, it lowers the incentive to save energy and to use alternative source like renewable energy. For a developing nation like Cambodia, this sort of perverse preference can spell a long-term energy crisis and thus completely beat the purpose of green development.
Of course, there are a few EXCEPTIONS to consider. First, if price ceiling is flexible (i.e. a function of cost), then the effect can go either way. Regardless, the aforementioned adverse consequences will be less likely to arise.
Another exception is when there is a joint-monopoly controlling the petroleum market in the country (a point well-made by my friend, one-dollar economist, who only happened to say it first... and demand credit). This means that there is a collusion (illegal cooperation) to keep gas price excessively high. Note, however, that in this case, it is a requirement that "price ceiling" imposed by the government be binding on the joint-monopoly's price, but not on the market price. So, if the colluded price is $2/litre and the market price is $1, then we want the price ceiling (max price chargeable) to be somewhere in between. The ideal is exactly at the $1 market price, but that is hard in practice because the market price can only be determined once a competitive market has been established (ex-post). As a good measure, the government can approximate price by looking into the gas price of neighboring countries or countries with similar characteristics as the affected country.
That's all for now. Hope you have learnt something useful from this post!