Government Price Controls

Readers Question: what are price controls? what is the effect of government price controls?

For various reasons governments may wish to intervene in a free market to set prices. Usually prices are set the market forces (where supply and demand differ) But, in some markets governments may want to artificially set different prices.

Minimum Prices.

minprices

This is when the government don’t allow prices to go below a certain level. If minimum prices are set above the equilibrium it will cause an increase in prices.

For example, the EU has used minimum prices for agriculture. It is argued farmer’s incomes are too low. Therefore, minimum prices have been used to increase prices above the equilibrium. This enables farmers to get a higher income.

However, the big problem is that this creates a surplus. Therefore, the government have to purchase the surplus to maintain a minimum price. The Common Agricultural Policy became very expensive because the minimum prices encouraged farmers to supply as much as possible.


Maximum Prices

maxprices

This is when the government wish to prevent prices going above a certain level. If a maximum price is placed below the equilibrium, prices will fall.

But if price is below the equilibrium, demand will be greater than supply leading to a shortage.

The government may wish to use maximum prices to reduce the cost of renting a house.

Related

12 Responses to Government Price Controls

  1. BB December 21, 2008 at 9:52 pm #

    advantages and disadvantages of maximum price control

  2. dennis August 26, 2010 at 11:01 am #

    pls help me to find a answr. to my question what is the effect of people with rising production with price control

  3. janani November 17, 2010 at 5:05 am #

    your comments about pricing control is very usefull for me thankyou

  4. JAYA PRIYA December 3, 2010 at 11:45 am #

    your idea was not useful for me.. kindly elaborate more

  5. moses mayar December 10, 2010 at 9:26 am #

    thank’s, the idea is useful and would like to help with,
    advantages and disadvantages of government prices control policy.

  6. moses mayar December 10, 2010 at 9:36 am #

    what about goods prices control?

  7. makomborero July 27, 2011 at 7:28 pm #

    are price controls good or bad

  8. Chinthana Weerasinghe August 13, 2011 at 8:18 am #

    Clear definition for price control. Thanks.

  9. Nancy November 9, 2011 at 8:22 am #

    are there any differences among different industries while government control their prices? what’s the side effect of Government Price Controls? is it only useful in the short time? could you explain a bit? thank you

  10. Deborah December 6, 2011 at 12:52 pm #

    pls i need u 2 tell me if it is good 4 Nigeria 2 have a price control policy n with reasons pls

  11. Adebolanle elizabeth ogunyemi March 17, 2012 at 11:12 am #

    Pls analyse economic consequences of government price control policy in nigeria.thanks

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  1. Blog Post Question 1: u3056642 « 6606 Government Business-Relations - December 20, 2010

    […] 1.¬†Economics Help (2007). Government Price Control. Retrieved December 19, 2010, from http://www.economicshelp.org/blog/markets/government-price-control/. […]