Price controls are governmental impositions on the prices charged for goods and services in a free market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternately, to insure an income for providers of certain goods. There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged.
Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.
Criticisms
The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product.[1] Shortages, in turn, lead to black markets where prices for the same good exceed those of an uncontrolled market.[1] Furthermore, once controls are removed, prices will immediately be subject to rampant inflation, which can temporarily shock the economic system.[1]
A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973 and March 17, 1974. Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed [2] because of a shortage of fuel at the low price set by the U.S. Cost of Living Council. The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared. It made no difference whether prices were voluntarily or involuntarily posted below the market clearing price. Scarcity resulted in either case. Price controls fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but such controls do manage to reduce supply.[3]
References
- Economic Amnesia: The Case against Price Controls by Jerry Taylor and Peter Van Doren
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