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.
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.
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.