With Chinese inflation rising to over 7% many people are suggesting – Why Not Use Price Controls to Stop Food Inflation?
China and other Asian economies have seen a particular marked rise in food inflation. This creates various problems. Firstly, it particularly affects the rural poor who experience a decline in living standards. Secondly, the rise in food prices indirectly increase the cost of production for the manufacturing sector; many firms feed workers directly.
Imposing price controls enables the government to keep a lid on prices making life more affordable. This is done in countries such as India. However, the basic economic problem is that imposing price controls reduces the incentive for firms to supply more. Therefore, it can actually make the situation worse in the long term because if lower prices discourage investment, the fall in supply will raise future prices. It would be better to allow market forces to raise prices and (hopefully) increase supply.
Can Price controls ever be justified?
One case where price controls may be justified is if rising prices are caused by monopoly power. If prices are kept high by monopolies then a reduction in price will not cause lower supply.