Price Controls – Advantages and Disadvantages

Readers Question: what are the pros and cons of price control?

Price controls can take the form of

Maximum Prices – Price can’t rise above a certain level. This can reduce prices below the market equilibrium price. The advantage is that it may lead to lower prices for consumers.

Diagram Maximum Price

The disadvantage is that it will lead to lower supply. There will also be a shortage, demand will exceed supply; this leads to waiting lists and the emergence of black markets as people try to overcome the shortage of the good and pay well above market price.

Examples

  1. For example, during the second world war, price of goods was fixed and good rationed. However, this encouraged people to sell on the black market through inflated prices.
  2. Tickets for football prices and concerts are often set at a maximum price. (e.g. if left to the market, equilibrium prices would be much higher). e.g. at current prices F.A. Cup final could sell many more tickets than 80,000.
  • The advantage of setting this maximum prices is that it keeps football affordable for the average football supporter. It is argue if prices were set solely by market forces, it would be just the wealthy who could afford to go to games.
  • The disadvantage is that it means some who want to go to the game can’t because there is a shortage of tickets.

3. The government may set a maximum price for renting to keep housing affordable.

  • This may reduce supply of housing leading to homelessness.
  • However, it may be that landlords have monopoly power and supply is very inelastic. In this case a maximum price may make renting cheaper without reducing supply

Minimum Prices

Minimum prices are used to give producers a higher income. They are used to increase the income of farmers producing goods.

For example, the EU had a Common Agricultural Policy (CAP). This increased the income of farmers by setting minimum prices.

Diagram Minimum Prices

The Disadvantage of Minimum Prices

  • Higher prices for consumers. We had to pay more for food
  • Higher tariffs necessary on imports. The EU put tariffs on food to keep prices artificially high.
  • May encourage oversupply and inefficient. The CAP encouraged farmers to produce food that no one actually wanted to eat.
  • We had over-supply (butter mountains, wine lakes)

Conclusion

Generally price controls distort the working of the market and lead to over supply or shortage. They can exacerbate problems rather than solve them. Nevertheless there may be occasions when price controls can help for example, with highly volatile agricultural prices

See also:

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