Government Price Control

Readers Question: what is price control? what is the effect of government price control?

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.

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. 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.

• Minimum prices for Olive Oil
  
• Disadvantages of CAP

Maximum Prices

This is when the government wish to prevent prices going above a certain level. If a maximum price is place below the equilibrium, prices will fall. But demand will be greater than supply there will be a shortage.

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

• Market equilibrium