Price controls
Encyclopedia
Price controls are governmental impositions on the prices charged for goods and services in a market
, usually intended to maintain the affordability of staple food
s and goods, and to prevent price gouging
during shortages, or, alternatively, to insure an income for providers of certain goods. 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.
Historically, price controls have often been imposed as part of a larger incomes policy
package also employing wage
controls and other regulatory elements.
This type of policy dates to the Old Testament
, in which Israelites were instructed not to charge interest to other Israelites. It was tried during the Roman Empire
.
Price controls have also been used in modern times for such things as rent control in New York City
and usury
laws. Although they have been resorted to often, economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided.
States have sometimes chosen to implement their own control policies. California
controls the prices of electricity
within the state, which economist Thomas Sowell
blames for the occasional electricity shortages the state experiences. Sowell said of California's controls in 2001: "Since the utility companies have been paying more for electricity than they were allowed to charge their customers, they were operating in the red and the financial markets are downgrading their bonds." California's price-setting board has agreed to raise rates, but not as much as the companies were paying on the wholesale market for their electricity. Economist Lawrence Makovich contended, "We've already seen in California that price caps on retail rates increased demand and made the shortage worse and price caps also forced the largest utility, Pacific Gas and Electric, into bankruptcy in four months." While some charged that electricity providers had in past years charged above-market rates, in 2002 the San Francisco Chronicle
reported that before the blackouts, many energy providers left the state because they could make a greater profit in other Western states. The Federal Energy Regulatory Commission
stepped in and set price caps
for each megawatt of power bought, after lifting the caps to avoid rolling blackout
s six months previously.
The state of Hawaii
briefly introduced a cap on the wholesale price of gasoline
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.
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 [maximum] law, after having proved destructive to many people, was from mere necessity abolished." As with Diocletian's Edict on Maximum Prices
, shortages lead to black markets where prices for the same good exceed those of an uncontrolled market. Furthermore, once controls are removed, prices will immediately increase, which can temporarily shock the economic system.
A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973 and March 17, 1974
. Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel at the low price set by 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. When price controls on gasoline were lifted, the shortage ended and the long lines of cars at gas pumps disappeared.
Nobel 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."
Nixon
's Secretary of the Treasury, George Shultz, enacting Nixon's "New Economic Policy," lifted price controls that had begun in 1971. This lifting of price controls resulted in a rapid increase in prices. Price freezes were reestablished five months later.
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, usually intended to maintain the affordability of staple food
Staple food
A staple food is one that is eaten regularly and in such quantities that it constitutes a dominant portion of a diet, and that supplies a high proportion of energy and nutrient needs. Most people live on a diet based on one or more staples...
s and goods, and to prevent price gouging
Price gouging
Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a crime that applies in some of the United States during civil emergencies...
during shortages, or, alternatively, to insure an income for providers of certain goods. There are two primary forms of price control, a price ceiling
Price ceiling
A price ceiling is a government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled...
, the maximum price that can be charged, and a price floor
Price floor
A price floor is a government- or group-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price.-Effectiveness of price floors:...
, the minimum price that can be charged.
Historically, price controls have often been imposed as part of a larger incomes policy
Incomes policy
Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually below market level.Incomes policies have often been resorted to during wartime...
package also employing wage
Wage
A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
controls and other regulatory elements.
This type of policy dates to the Old Testament
Old Testament
The Old Testament, of which Christians hold different views, is a Christian term for the religious writings of ancient Israel held sacred and inspired by Christians which overlaps with the 24-book canon of the Masoretic Text of Judaism...
, in which Israelites were instructed not to charge interest to other Israelites. It was tried during the Roman Empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....
.
Price controls have also been used in modern times for such things as rent control in New York City
Rent control in New York
Rent control in New York refers to rent control and rent stabilization programs in New York State, USA. Each city may choose whether to participate or not, and , 51 municipalities participated in the program, including Albany, Buffalo and most famously, New York City, where over one million...
and usury
Usury
Usury Originally, when the charging of interest was still banned by Christian churches, usury simply meant the charging of interest at any rate . In countries where the charging of interest became acceptable, the term came to be used for interest above the rate allowed by law...
laws. Although they have been resorted to often, economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided.
States have sometimes chosen to implement their own control policies. California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
controls the prices of electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
within the state, which economist Thomas Sowell
Thomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
blames for the occasional electricity shortages the state experiences. Sowell said of California's controls in 2001: "Since the utility companies have been paying more for electricity than they were allowed to charge their customers, they were operating in the red and the financial markets are downgrading their bonds." California's price-setting board has agreed to raise rates, but not as much as the companies were paying on the wholesale market for their electricity. Economist Lawrence Makovich contended, "We've already seen in California that price caps on retail rates increased demand and made the shortage worse and price caps also forced the largest utility, Pacific Gas and Electric, into bankruptcy in four months." While some charged that electricity providers had in past years charged above-market rates, in 2002 the San Francisco Chronicle
San Francisco Chronicle
thumb|right|upright|The Chronicle Building following the [[1906 San Francisco earthquake|1906 earthquake]] and fireThe San Francisco Chronicle is a newspaper serving primarily the San Francisco Bay Area of the U.S. state of California, but distributed throughout Northern and Central California,...
reported that before the blackouts, many energy providers left the state because they could make a greater profit in other Western states. The Federal Energy Regulatory Commission
Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates...
stepped in and set price caps
Price ceiling
A price ceiling is a government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. However, a price ceiling can cause problems if imposed for a long period without controlled...
for each megawatt of power bought, after lifting the caps to avoid rolling blackout
Rolling blackout
A rolling blackout, also referred to as load shedding, is an intentionally-engineered electrical power outage where electricity delivery is stopped for non-overlapping periods of time over geographical regions. Rolling blackouts are a last-resort measure used by an electric utility company in order...
s six months previously.
The state of Hawaii
Hawaii
Hawaii is the newest of the 50 U.S. states , and is the only U.S. state made up entirely of islands. It is the northernmost island group in Polynesia, occupying most of an archipelago in the central Pacific Ocean, southwest of the continental United States, southeast of Japan, and northeast of...
briefly introduced a cap on the wholesale price of gasoline
Gasoline
Gasoline , or petrol , is a toxic, translucent, petroleum-derived liquid that is primarily used as a fuel in internal combustion engines. It consists mostly of organic compounds obtained by the fractional distillation of petroleum, enhanced with a variety of additives. Some gasolines also contain...
in an effort to fight "price gouging
Price gouging
Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a crime that applies in some of the United States during civil emergencies...
" in that state in 2005. Because it was widely seen as too soft and ineffective, it was repealed shortly thereafter.
Criticisms
The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product. For example, LactantiusLactantius
Lucius Caecilius Firmianus Lactantius was an early Christian author who became an advisor to the first Christian Roman emperor, Constantine I, guiding his religious policy as it developed, and tutor to his son.-Biography:...
wrote that Diocletian
Diocletian
Diocletian |latinized]] upon his accession to Diocletian . c. 22 December 244 – 3 December 311), was a Roman Emperor from 284 to 305....
"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 [maximum] law, after having proved destructive to many people, was from mere necessity abolished." As with Diocletian's Edict on Maximum Prices
Edict on Maximum Prices
The Edict on Maximum Prices was issued in 301 by Roman Emperor Diocletian....
, shortages lead to black markets where prices for the same good exceed those of an uncontrolled market. Furthermore, once controls are removed, prices will immediately increase, which can temporarily shock the economic system.
A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973 and March 17, 1974
1973 world oil market chronology
*January 11: U.S. Phase III price controls begin. Allows for voluntary instead of mandatory price control on all U.S. prices. This does not prevent a sharp rise in heating oil prices caused by a severe winter and shortage of product....
. Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel at the low price set by 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. When price controls on gasoline were lifted, the shortage ended and the long lines of cars at gas pumps disappeared.
Nobel prize winner Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
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."
Nixon
Nixon
Richard Nixon was the 37th President of the United States.Nixon may also refer to:-Related to Richard Nixon:Movies*Nixon *Elvis Meets Nixon*The Assassination of Richard Nixon*Frost/NixonOther*Nixon Doctrine...
's Secretary of the Treasury, George Shultz, enacting Nixon's "New Economic Policy," lifted price controls that had begun in 1971. This lifting of price controls resulted in a rapid increase in prices. Price freezes were reestablished five months later.
External links
- Economic Amnesia: The Case against Price Controls by Jerry Taylor and Peter Van Doren
- The Theory of Price Controls by Stephanie Laguerodie and Francisco Vergara (from Review of Political Economy)