Price control
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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].
Examples of Price control
- Price ceilings: These are implemented by governments to prevent prices from rising too high. Examples include rent control, which limits the amount of rent a landlord can charge, or maximum prices of essential goods, such as food, fuel, and medicine.
- Price floors: Price floors are the opposite of price ceilings, and are used to prevent prices from falling too low. Examples include minimum wages, which are set to ensure workers are paid a livable wage, or agricultural subsidies, which are implemented to ensure farmers receive a fair price for their produce.
- Direct Price Controls: Direct price controls are implemented by governments to control the prices of specific goods or services. Examples include the setting of prices for utilities, such as electricity, water, and gas, or setting the prices of drugs and medicines.
Advantages of Price control
Price control can be beneficial for both consumers and producers. It can be used to stabilize prices, prevent shortages, and protect against predatory pricing. The following are some of the advantages of price control:
- Price control can help to ensure that the price of essential goods and services remain affordable. This helps to protect consumers from price gouging, ensuring that basic necessities remain available to all.
- Price control can also help to stabilize prices, preventing sharp price fluctuations in response to changes in demand. This helps to protect businesses from the risk of sudden drops in revenue.
- Price control can also be used to limit the profits of large firms that dominate a market, preventing them from taking advantage of their market position to exploit consumers.
- Finally, price control can be used to protect domestic producers from unfair competition from foreign producers, allowing them to remain competitive in the global market.
Limitations of Price control
Price control has certain limitations. These include:
- Inefficiency in production and trade: Price control can lead to inefficiencies in production and trade, as producers may be unable to adjust to changing market conditions.
- Disincentive to produce: Price control can lead to decreased production, as producers may be unwilling to produce goods if they cannot be sold at a profitable price.
- Black market: Price control can lead to the emergence of a black market, as producers may find ways to circumvent the law and sell goods at higher prices.
- Inflation: Price control can lead to inflation as the demand for products may exceed the supply, resulting in an increase in prices.
- Reduced quality: Price control can lead to a decrease in the quality of goods, as producers may be unable to invest in research and development and may opt for cheaper production methods.
One other approach related to Price Control is the use of subsidies, which are payments made by the government to businesses or households to reduce the cost of certain goods or services. This can be used to help keep prices low in a particular industry or to promote certain products. Other approaches include:
- Price Floors: Price floors are the minimum price that can be charged for a good or service. Governments will use price floors to protect consumers from exploitation and to ensure that producers receive a reasonable return on their investments.
- Price Ceilings: Price ceilings are the maximum price that can be charged for a good or service. Governments will use price ceilings to protect consumers from price gouging and to ensure that products are affordable.
- Quantity Controls: Quantity controls are limits placed on the amount of a product that can be produced and sold. This can be used to manage the supply of a product and to ensure that the price remains stable.
In summary, Price Control is a law provided by a government which sets minimum or maximum prices for specified goods. Other approaches related to Price Control include Price Floors, Price Ceilings, and Quantity Controls. These approaches are used to manage the affordability of goods, protect consumers, and to ensure that producers receive a reasonable return on their investments.
Footnotes
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
