What is the effect of price controls on buyers and sellers?

Answer 1

Assuming you mean an actual price control, such as a ceiling or floor, there are two very easily-identifiable effects.

When thinking about price controls, think of the supply and demand curves and remember that with a price control, it is impossible for a price to get into equilibrium. With that in mind, we can identify two problems that result from this.

1. A shortage/oversupply of the good. If there is a price ceiling, you have a shortage (a la gasoline during the price controls of the 70's.) If there is a floor, you have overproduction (a la ethanol. Which, granted, is subsidized, but that is effectively like a price floor).

2. An inefficient allocation of resources. With ethanol being subsidized, we witnessed a massive increase in the price of corn. The market did not want this, and thus we saw an inefficient allocation of resources.

Answer 2

The major advantage of price control is stability which "should" create confidence amongst the consumers and producers (you know what deal you're getting.) In addition, a low controlled price would stimulate growth (as seen in energy subsidy in LDCs) Also, price controls are often used as a measure to control inflation.

However, in recent history, almost all attempts at price control has failed since it undermined the market force.

What happens when prices are controlled are:

• Black market: especially when there are disruption in supply and demand, black markets will be created (since all demands are not satisfied)
• Holding out of stock: Happens when the producers believe the controlled price is below the market price i.e. they make less profit. Therefore, they opt to hold onto their stock knowing that at some point, the government will have to lift that control on price (Vietnam petrol industry in early 2011; Brazil economy during hyperinflation)
• Creates unemployment: because business makes less profit (due to lower price), they won't be able to hire as many people and would need to fire them => more unemployment which can lead to less economic growth.

Answer 3

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