Question

"Explain why economists usually oppose controls on prices"

Answer 1

The equilibrium price is set where demand meets supply, this will be where the maximum level of supply and demand for a good or service finds congruence if the markets are efficient. Price controls can be enforced as markets are not always effective, so many market distorting situations can occur. For example, when a monopolist or cartel forms supply restriction for the price to rise, or when a price bubble occurs because of excessive speculation. Even competition can produce a sub-optimal result, because economic efficiency is not perfectly correlated with policy goals.

For example, when Singapore's health sector was deregulated, prices increased because hospitals began to compete by offering doctors higher salaries and buying expensive technologies. Other objectives may include strategic considerations, such as safeguarding vital domestic industries such as food production in conflict situations. The problem is that governments are inefficient, too, and the economy is far too complex. This is a well-established fact, even when a price bubble forms, many economists advocate non-interference because policies often worsen the situation, favored after the bubble bursts to' clean up.'

The effect of price controls often leads to shortages or excess supply, as the price is often set below or above the level of equilibrium, creating a distortive effect. This often results in large direct costs, such as when the government artificially increases the price by purchasing from manufacturers (i.e., the EU-created butter mountain) or the cost of opportunity.If you compare market efficiency with governments, the markets will produce far better results on average. Policymaking is often politically motivated aside from poor or inept decision making.

This is a human-made problem. When a strategy produces an optimal outcome that triggers the loss of billions of dollars distributed over a large population, there won't be much resistance. Like when tariffs are imposed, this causes some dollars in the price of certain goods to go up. On the other hand, the efficient outcome can result in smaller but concentrated losses in a small segment of the electorate, such as workers in a particular industry. It results in demonstrations, and the negative policies will be preferred as politicians are motivated to be elected rather than any other reason.