Question

Why do most economists oppose attempts to control prices? Why does the government attempt to control prices anyway in a number of markets?

Do a Google search and share some examples of price controls with your classmates (rent controls and Venezuela could be very interesting).

Answer 1

The attempts to price control are made when the government or the policy makers are of the view that the current prices of goods or services are unfair to either the seller or the buyer as the case may be.

Now, most of the ecomomists oppose attempts to control prices due to the fact that pice control distort the allocation of resources. This can be explained by:

Price ceiling: It stops or limits the prices from exceeding beyond a certain limits thus causing shortage.

Price floor: It prevents the prices from falling below a certain limit thus causing surpluses.

For example, if the supply and demand for bread and milk are balanced at the current price, and that the government then fixes a lower maximum price.

Now, the government attempts to control prices anyway because the motive behind exercising this control by the government is to protect the interest of consumers.

This means protecting the interest of all the consumers alike and thus coming up with such price controls that prove to be beneficial not just for the rich or poor but for both.

Examples of price controls:

Consider a rental market with an equilibrium of $1000/month.

Now, the government wishes to decrease this price to make it more affordable for renters and thus it imposes a price ceiling of $700/month.

This means that the landlords cannot charge more than $700 per month.

Now, let us assume before 400 homes were rented, now there is housing shortage.

At the lower price of $700/month, quantity supplied is only 300 housing units and a quantity demanded is 500 housing units.

This means that 200 renters who want to rent will not be able to find home.

This is important, because when quantity demanded and quantity supplied are unequal, the market is restrained by the lower value.