Last night, I was driving home through the I-93 tunnel in Boston. Near the entrance of the tunnel stood one of those big highway signs that read “Accident Ahead! All Traffic Must Merge Left.” Being good motorists and wanting to avoid adding to the accident, everyone on the highway obeyed the sign. This, naturally, caused traffic to slow to a crawl. Moving ahead at about 10 miles per hour, we edged our way into the tunnel…the perfectly clear tunnel. There was no accident. All the debris has been cleaned up. There was nothing to see. Upon realizing this, the motorists naturally resumed their regular speed.
Why do I tell this story? What does this have to do with economics? Surprisingly, a lot. Earlier today, we discussed how prices are signals. A manipulated price, whether a price floor (such as minimum wage) or price ceiling (such as a cap on gas prices) act in the same manner as the aforementioned highway sign: they provide false information that can disrupt the flow of traffic (ie economic activity). In other words, even if the fundamental economic conditions do not change (no accident in the tunnel), a signal saying otherwise still messes up the flow.