Price controls

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World War I poster of the United States Food Administration

Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of goods even during shortages, and to slow inflation, or, alternatively, to ensure a minimum income for providers of certain goods or to try to achieve a living wage. There are two primary forms of price control: a price ceiling, the maximum price that can be charged; and a price floor, the minimum price that can be charged. A well-known example of a price ceiling is rent control, which limits the increases that a landlord is permitted by government to charge for rent. A widely used price floor is minimum wage (wages are the price of labor). Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.

Although price controls are routinely used by governments, Western economists generally agree that consumer price controls do not accomplish what they intend to in market economies, and many economists instead recommend such controls should be avoided.[1] However, since the credibility revolution starting in the 1990s, minimum wages have found strong support among some economists.[2][3][4][5]

History

The maximum retail price (MRP) of this bottle of water in Sri Lanka is 90 Rupees

The Roman Emperor

the Law of the Maximum
set price limits on the sale of food and other staples.

Governments in

rent control.[1] During World War I, the United States Food Administration enforced price controls on food.[7][8][9][10] Price controls were also imposed in the US and Nazi Germany during World War II.[11][12]

Postwar

neoclassical economic theory supports the alternative remedy of reducing the money supply and proposes that monetary inflation is caused by too much money creation by the central bank.[citation needed
]

United Kingdom

The National Board for Prices and Incomes was created by the government of Harold Wilson in 1965 in an attempt to solve the problem of inflation in the British economy by managing wages and prices. The Prices and Incomes Act 1966 c. 33 affected UK labour law, regarding wage levels and price policies. It allowed the government to begin a process to scrutinise rising levels of wages (then around 8% per year) by initiating reports and inquiries and ultimately giving orders for a standstill. The objective was to control inflation. It proved unpopular after the 1960s.

United States

In the United States, price controls have been enacted several times. The first time price controls were enacted nationally was in 1906 as a part of the

Schechter Poultry Corp. v. United States
.

In 1971, President Richard Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices. The constitutionality of this action was challenged and upheld in the case of Amalgamated Meat Cutters v. Connally[14]

The individual states have sometimes chosen to implement their own control policies. In the 1860s, several midwestern states of the United States, namely Minnesota, Iowa, Wisconsin, and Illinois, enacted a series of laws called the Granger Laws, primarily to regulate rising fare prices of railroad and grain elevator companies.

The state of Hawaii briefly introduced a cap on the wholesale price of gasoline (the Gas Cap Law) in an effort to fight "price gouging" in that state in 2005. Because it was widely seen as too soft and ineffective, it was repealed shortly thereafter.[15]

A World War II-era shop display promoting price controls.

Venezuela

According to Girish Gupta from The Guardian, price controls have created a scarcity of basic goods and made black markets flourish under President Maduro.[16]

India

In India, the government first enacted price control in 2013 for the Drug Price Control Order (DPCO). This order gave local regulatory body, and the Pharmaceutical Pricing Authority the power to set ceiling prices on the National List of Essential medicines.[17]

Sri Lanka

In Sri Lanka, the Consumer Affairs Authority has the power to set the Maximum Retail Price (MRP) for goods specified by the government as essential commodities.[18] In 2021 the Sri Lankan government enacted price controls on several essential items resulting in shortages.[19][20]

Price floor

Main article: Price floor
Protesters call for an increased legal minimum wage as part of the "Fight for $15" effort to require a $15 per hour minimum wage in 2015. A government-set minimum wage is a price floor on the price of labour.

A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product,

equilibrium price
in order to be effective. The equilibrium price, commonly called the "market price", is the price where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change, often described as the point at which quantity demanded and quantity supplied are equal (in a perfectly competitive market). Governments use price floors to keep certain prices from going too low.

Two common price floors are

supply management in Canadian agriculture. Other price floors include regulated US airfares prior to 1978 and minimum price per-drink laws for alcohol.

World War II poster about US price controls

Since the credibility revolution starting in the 1990s, minimum wages have often found strong support among economists.[2][3][4][5]

Advantages of a price floor are:

  • May motivate producers to produce more.
  • May prevent the fluctuation of prices of agricultural products.
  • May reduce the over-exploitation of producers.
  • May reduce poverty and increase productivity among employees (in minimum wages)

Disadvantages of a price floor are:

  • Supply may exceed demand.
  • Resources may be wasted.
  • The government may be forced to buy the excess supply or it may be discarded (e.g., in an agricultural context).

Price ceiling

Main article: Price ceiling

A related government intervention to price floor, which is also a price control, is the

rent control
.

A price ceiling is a price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the event of monopoly ownership of a product, all of which can cause problems if imposed for a long period without controlled rationing, leading to shortages.[22] Further problems can occur if a government sets unrealistic price ceilings, causing business failures, stock crashes, or even economic crises. In fully unregulated market economies, price ceilings do not exist.

While price ceilings are often imposed by governments, there are also price ceilings that are implemented by non-governmental organizations such as companies, such as the practice of

manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or below a price ceiling (maximum resale price maintenance) or at or above a price floor
.

Criticism

The primary criticism leveled against the price ceiling type of price controls is that by keeping prices artificially low, demand is increased to the point where supply cannot keep up, leading to shortages in the price-controlled product.[23] For example, Lactantius wrote that Diocletian "by various taxes, he had made all things exceedingly expensive, attempted by a law to limit their prices. Then much blood [of merchants] was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the [price limit] law, after having proved destructive to many people, was from mere necessity abolished."[24]

As with Diocletian's

Ministry of Food
than actually happened. Another in Britain was supplies from the US, intended only for use in US army bases on British land, but leaked into the local native British black market.

A classic example of how price controls cause shortages was during the

U.S. Cost of Living Council. The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared. It made no difference whether prices were voluntarily or involuntarily posted below the market clearing price. Scarcity resulted in either case. Price controls fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but such controls do manage to reduce supply.[26][27]

Nobel Memorial Prize winner Milton Friedman said, "We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas."[28]

U.S. President

Nixon Shock). This lifting of price controls resulted in a rapid increase in prices. Price freezes were re-established five months later.[29] Stagflation was eventually ended in the United States when the Federal Reserve under chairman Paul Volcker
raised interest rates to unusually high levels. This successfully ended high inflation but caused a recession that ended in the early 1980s.

See also

References

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    OCLC 237794267
    .
  2. ^
    JSTOR 2117925
    .
  3. ^ a b Chletsos, Michael; Giotis, Georgios P. (2015-01-14). "The employment effect of minimum wage using 77 international studies since 1992: A meta-analysis". mpra.ub.uni-muenchen.de. Retrieved 2023-06-01.
  4. ^
    ISSN 1556-5068
    .
  5. ^
    ISBN 9781912809899
    .
  6. OCLC 31870180
    .
  7. ^ "File: "Prices charged in this store will not exceed those indicated in the most recent list of Fair Prices applicable to this – NARA – 512556.jpg – Wikimedia Commons". Retrieved 2012-01-21.
  8. ^ "File: "Closed. Public Notice. For Violation of the rules of the United States Food Administration This Place is Closed days... – NARA – 512564.tif – Wikimedia Commons". Retrieved 2012-01-21.
  9. ^ "File: "This Store sells at FAIR PRICES as interpreted by U.S. Food Administration...", ca. 1917 – ca. 1919 – NARA – 512714.tif – Wikimedia Commons". Retrieved 2012-01-21.
  10. ^ "File: "We violated the regulations of the Food Administration but have pledged Full Obedience in the Future.", ca. 1917 – ca. – NARA – 512528.jpg – Wikimedia Commons". Retrieved 2012-01-21.
  11. ^ Paths to Democracy: Revolution and Totalitarianism By Rosemary H. T. O'Kane page 135
  12. ^ "File: "Cost of Living 1918–1944" – NARA – 514088.jpg – Wikimedia Commons". Retrieved 2012-01-21.
  13. OCLC 966553031
    .
  14. ^ Amalgamated Meat Cutters v. Connally, 337 F. Supp. 737 (D.D.C. 1971)."Archived copy". Archived from the original on 2023-09-04. Retrieved 2023-09-04.{{cite web}}: CS1 maint: archived copy as title (link) CS1 maint: bot: original URL status unknown (link)
  15. ^ the well of natal
  16. ^ Girish Gupta (16 April 2015). "Price controls and scarcity force Venezuelans to turn to the black market for milk and toilet paper". The Guardian.
  17. ^ "Indian government releases DPCO 2013, expanding price controls to 652 drugs". ihsmarkit.com. Retrieved 2020-04-12.
  18. ^ "Pricing and Management Division". www.caa.gov.lk. Retrieved 2023-07-08.
  19. ^ "Sri Lanka declares food emergency as forex crisis worsens". Al Jazeera. Retrieved 2022-02-17.
  20. ^ "Sri Lanka allows sharp rise in food prices to ease shortages". Al Jazeera. Retrieved 2022-02-17.
  21. ^ "Price floor – Definitions from Dictionary.com". dictionary.reference.com. Retrieved 2008-05-02.
  22. OCLC 953710348.{{cite book}}: CS1 maint: location missing publisher (link) CS1 maint: multiple names: authors list (link
    )
  23. ^ a b c Walter J. Wessels, Economics (2000), pp. 232–33.
  24. ^ Lactantius. "CHAP. VII.". On the Deaths of the Persecutors (Christian Classics Ethereal Library ed.). Calvin College. {{cite book}}: |work= ignored (help)
  25. ISBN 978-1904897118
    .
  26. ^ Taylor and Van Doren, pp. 26–28
  27. ISBN 0465003451
  28. ^ "Controls blamed for U.S. energy woes", Los Angeles Times, February 13, 1977, Milton Friedman press conference in Los Angeles.
  29. ^ "George P. Shultz (1972–1974)". Treasury.gov. 2010-11-20. Retrieved 2013-09-27.

Further reading

External links

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