Price Controls – Advantages and Disadvantages

Readers Question: what is the answer for the advantages and disadvantages 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.

Minimum Prices

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

Diagram Minimum Prices

The disadvantage of Minimum Prices

• Higher prices for consumers
• Higher tariffs necessary on imports
• May encourage oversupply and inefficient.

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:

• Buffer Stocks
• Disadvantages of CAP