Price control

Price control
See also

Price Control is a law provided by a government which sets minimum or maximum prices for specified goods. It is usually implemented to manage the affordability of goods. Price controlling is a mean of direct economic intervention[1].

Types of price control

Price control is a common mechanism for stabilizing prices and slowing inflation. There are two main forms of price control:

  • Price ceiling

A price ceiling is a legal maximum on the price at which a good can be sold. This kind of market regulations is imposed by the government to prevent prices of essentials from rising or to make people afford it. As the costs go down, a demand for goods is stimulated. If the ceiling price is higher than the free market equilibrium (the price where supply and demand are balanced), it is not effective.

An example of a price ceiling is rent control. In many cities, there is a ceiling placed on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making housing more affordable[2][3].

  • Price floor

A price floor is a minimal price at which a good can be sold, imposed by law. This mechanism can regulate supply and demand. If the floor price is lower than the free market equilibrium price, the mechanism does not affect the market. If the new lowest price for specified goods is higher than in the past, it can lead to reducing purchases of it, make people switch to substitutes or leave the market. On the other side, suppliers are guaranteed a new, higher price than before, so that they can increase production. Price floor mechanism can generate some surplus of the product[4].

An example of a price floor is a carbon price floor for power generation imposed by several European countries. Prices of carbon used to produce electricity has been raised to reduce the production of it as the carbon reduction target for 2030 is to lower the production by 40%. Higher prices make the producers change their technologies for cleaner as carbon becomes unprofitable[5].

Problems with price control

The determining of market prices through the dynamic interaction of supply and demand is the basic building block od economics. Consumers can purchase more products if the price declines. Companies decide how much they want to supply at different prices. When the government starts a price control, it defines the market price of a product and forces transactions to take place at that price instead of the equilibrium price. Since supply and demand shift constantly in response to tastes and costs, the government price will never be an equilibrium price. This means that it will be either too high or too low[6][7].

When the price is too high, there is an excessive amount of the product for sale compared to what people want. The government, to increase companies' incomes higher the prices and then they produce too much because people do not want it.

Serious problem results when the government sets the maximum price below the equilibrium value. This causes consumers to want more of the product than producers have available. This causes shortages and forming of long queues in front of shops[8].

Footnotes

  1. Mankiw N. G., Taylor M. P. (2017)
  2. Mankiw N. G., Taylor M. P. (2017)
  3. Schoonveld E. (2015)
  4. Mankiw N. G., Taylor M. P. (2017)
  5. Newbery D. M., Reiner D. M., Ritz R. A. (2019)
  6. Mankiw N. G., Taylor M. P. (2017)
  7. Scott Morton F. M. (2001)
  8. Scott Morton F. M. (2001)

References

  • Crew M., Parker D. (2006), International handbook on economic regulation, Edward Elgar Publishing, UK, United States
  • Mankiw N. G., Taylor M. P. (2017), Economics, Cengage Learning, UK
  • Newbery D. M., Reiner D. M., Ritz R. A. (2019), The Political Economy of a Carbon Price Floor for Power Generation, Energy Journal, EU
  • Schoonveld E. (2015), The price of global health, Routledge, UK, United States
  • Scott Morton F. M. (2001), The problems of price controls, Yale University, United States

Author: Anna Marzec