What are Price Controls
Price controls are government-mandated legal minimum or maximum prices set for specified goods, usually implemented as a means of direct economic intervention to manage the affordability of certain goods. Governments most commonly implement price controls on staples, essential items such as food or energy products. Price controls that set maximum prices are price ceilings, while price controls that set minimum prices are price floors.
BREAKING DOWN Price Controls
Price controls – to judge by the long history of governments making use of such measures – has shown that, at best, they are only effective measures on an extremely short-term basis. Over the long term, price controls inevitably lead to problems such as shortages, rationing, deterioration of product quality and black markets that arise to supply the price-controlled goods through unofficial channels. One example in the United States is the price controls set on gasoline established during the Nixon administration, which eventually led to major shortages in supply and long, slow lines at gas pumps.
Rent controls are another frequently cited example of the ineffectiveness of price controls. Rent control policies widely implemented in New York City were intended to help maintain an adequate supply of affordable housing. However, the actual effect has been to reduce the overall supply of available rental space, which in turn has led to even higher prices in the market of available rental housing. The net effect of rent controls is to discourage real estate entrepreneurs from becoming landlords, thus creating a supply situation in which there is less rental housing available than the amount that would be created by the free market, thereby putting continual upward pressure on rental rates. Controlled rental rates also effectively discourage landlords from making the necessary expenditures to maintain or improve rental properties, leading to deterioration in the quality of rental housing.
The Economic Basics of Price Controls
As a government measure, price controls may have been enacted with the best of intentions, but in actual practice, they don't work. No attempt to control prices can overcome the basic economic forces of supply and demand for any significant length of time. When prices are established by commerce in a free market, prices shift to maintain the balance between supply and demand. However, when a government imposes price controls – precisely because it refuses to accept the free market equilibrium price – then the eventual, inevitable consequence is the creation of excess demand in the case of price ceilings, or excess supply in the case of price floors.
Again, the gasoline price controls of the 1970s provide a classic example. No government attempts to cap the price of gasoline could change the basic economic fact that gasoline producers were only willing to sell an extremely limited supply of gasoline for the price set by the government. This resulted in extreme shortages in gasoline.