In the early 1970s, inflation was hitting the U.S. economy, and one of the results was...

In the early 1970s, inflation was hitting the U.S. economy, and one of the results was that beef prices began to rise to record levels. Some of President Richard Nixon's advisers urged him to place price controls on the sale of beef cattle with the intended purpose being to hold down the price of cattle. If cattle prices were kept from rising, the advisers reasoned, then beef prices also would not rise. (The president did not follow their recommendations, but he did place overall wage and price controls on the economy for a while.) Had the president implemented this recommendation of price controls on beef cattle, would that action have resulted in lower beef prices? Why or why not?

Expert Solution

The market always corrects itself. Since cattle prices were rising, more and more people would have wanted to join the business increasing the supply of cattle. The rising prices (high demand) and high supply would have eventually come to an equilibrium where the price of cattle may have been high but static. Accordingly the price of beef would have been set.

However, let us assume now that the recommendation of advisers was implemented. So the price of cattle would have been fixed. Now since there is a ceiling on prices, so it means that the profitability is also limited. As more and more people enter the business, there will be lesser and lesser profit. So people will not want to join the business of cattle.

This will create a supply shock as there will be very little cattle now as compared to the time when there was no price ceiling. So even though the price of cattle is fixed at a ceiling, since there is limited supply, the supply of beef goes down a lot.

Irrespective of the price at which cattle is bought by the business owners of beef, since there is a high demand and low supply, the selling price of beef will still remain high. Thus even if there are price controls to fix the cattle price, the price of beef will not come down.

Rahul Sunny answered 6 months ago

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