The SNP's John Swinney intends to impose price controls on food
"Swinney said his plan to legally cap the price of some food items in supermarkets was a reaction to the cost of living crisis. He said people were "struggling to afford a very basic shop" and that he had a "public health responsibility" to provide an affordable nutritious diet. Under the SNP manifesto pledge, large supermarkets would be compelled to limit the cost of up to 50 essential items such as milk, eggs, cheese and rice."
Price controls are one of the most studied policy interventions in economics, and the near-universal verdict among economists is that they backfire.
The core problem is that prices are signals, not villains. Prices convey information about scarcity, cost of production, and consumer demand. When a government artificially suppresses a price below the market-clearing level, it does not eliminate the underlying cost pressures; it merely hides them while creating new distortions.
The basic supply-and-demand mechanism explains clearly why shortages result. A price cap set below the market price simultaneously increases demand because more consumers want the now-cheaper product, and decreases supply; producers and retailers earn less, so they reduce output, stock less, or exit the market entirely
Supermarkets operating on razor-thin margins (typically 2-4%) will simply stop stocking capped items if they become loss-making. A retailer cannot legally be forced to sell something at a loss indefinitely. They will delist the product, reduce quality, or shrink pack sizes - so-called ‘shrinkflation’ through the back door.
When the legal price diverges from the true market-clearing price, the gap becomes profit for anyone willing to break the rules. Historically this leads to goods being diverted to unregulated channels such as corner shops or online sellers not covered by the law.
It also leads to quality degradation as producers cut costs to preserve margins. Corruption and preferential allocation to favoured customers emerge, together with ‘under the counter’ sales at the real market price.
Large supermarkets, specifically targeted by this policy, have enormous legal and commercial flexibility. They can respond by bundling, requiring purchase of a non-capped item alongside a capped one. They might alternatively reduce availability in lower-income areas where margins are already thinner, or substituting own-brand variants not covered by the caps.
This is by no means theoretical. Price controls have repeatedly produced exactly these outcomes.
Venezuela imposed food price controls in the 2000s-2010s, resulting in chronic shortages of basic staples, empty supermarket shelves, and a vast black market. Nixon's 1970s price controls on fuel and food in the US created petrol queues stretching for miles and meat shortages. Post-WWII rent controls in many cities, while different in mechanism, demonstrated the same principle, namely that the controlled good becomes scarce and quality deteriorates.
Even economists sympathetic to intervention point out that price caps are a blunt instrument. They benefit all buyers of the capped goods, including wealthy ones, rather than targeting help at those who need it. Direct cash transfers, expanded benefits, or voucher schemes would target money to struggling households far more efficiently without distorting supply.
The political economy is understandable even if the economics are not. The benefits of a price cap are visible and immediate, with a lower price on the shelf today. The costs are diffuse and delayed with shortages emerging over weeks or months, together with quality degradation that is hard to attribute directly to the policy. This asymmetry makes price controls politically attractive even when economists across the ideological spectrum, from the left-leaning IMF to free-market think tanks, consistently warn against them.
Who knows? Swinney may be genuinely motivated by concern for struggling families, but the mechanism he's chosen has a strong historical track record of hurting the very people it purports to help. Rachel Reeves take note.
Madsen Pirie