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:

22 Responses to Price Controls – Advantages and Disadvantages

  1. zahrin January 22, 2009 at 11:57 pm #

    thanx,useful for my coming test

  2. erasmus hyera February 19, 2009 at 1:34 pm #

    who are members of this economics blog and how can i become a member via this economic blog.what are the roles this blog pray apart from assistance to questions

  3. Kennedy February 11, 2010 at 9:05 am #

    Very helpful. thanks.

  4. monica July 12, 2010 at 7:49 am #

    thanx,has assisted a lot

  5. maxokeyo July 16, 2010 at 6:09 am #

    What are the advantages of government price controls?

  6. cajarling July 31, 2010 at 9:06 am #

    thanks but more about price controls on consumers should be added

  7. nicholas kiptanui kibet November 5, 2010 at 1:31 pm #

    Good work, keep it up; it has assisted me to score distiction in my Economic unit, may the lord bless you abandantlly.

    nicholas.

  8. nicholas kiptanui kibet November 5, 2010 at 1:38 pm #

    towards consumer is that, its widens consumers choice(alternative)

  9. Emmanuel March 29, 2011 at 4:03 pm #

    Thanks, I encountered this question in a past test and thought to follow it up. The results were good

  10. edson simbarashe mbodza April 17, 2011 at 3:28 pm #

    thanx..useful for my CIS Exams

  11. chisom April 26, 2011 at 2:19 pm #

    i need 2 know the objectives of these price control

  12. Rowlings October 6, 2011 at 5:22 pm #

    Waaw!!!! Kiptui’s assignment is over,thanx

    • joey October 21, 2011 at 11:50 am #

      @rowlings whatever the course.did you do communication skills,this is plagiarism n i will tell kiptui

  13. joey October 21, 2011 at 11:51 am #

    ds will help me complete my assignments in a jiffy..

  14. lucy jerop November 30, 2011 at 7:57 am #

    thanx,it had been had quiz to me.

  15. celestine January 29, 2012 at 10:08 am #

    needed like five advantages only got two!!! anyways thanks

  16. olywon September 28, 2012 at 3:48 am #

    Beautiful tips 4 2days exam.

  17. Eric odhiambo-MMU October 18, 2012 at 12:22 pm #

    Wonderful!thnx alot.im now ready 4 the next class representation.am greatful

  18. Eric odhiambo-MMU October 18, 2012 at 12:25 pm #

    Anyone who want us to learn economics together 2 contact me on 0705275889(kenya)

    • muhammad taha January 12, 2013 at 10:12 pm #

      i have some problem in As eco so kindly help me online if you can…

  19. navya August 12, 2013 at 8:37 am #

    thanx,this is very useful to me.

Trackbacks/Pingbacks

  1. Government Price Controls | Economics Blog - July 28, 2011

    [...] Pros and Cons of Price Contros [...]