Price Controls

Price controls refer to the technique of establishing a lower limit or upper limit of the selling price of specified goods and services. In other words, the government intervenes to set the maximum or minimum price of products and services in the market.

Usually, the government imposes such techniques as a short-term measure to ensure the affordability of essential products and services to the public, fight inflation and deflation, etc. It, in turn, maintains the consumers' purchasing power and economic growth. However, in the long run, the control measures seem ineffective.

• Price controls refer to the deliberate action of setting maximum or minimum prices for specified goods and services by the government.
• They are generally classified into two types - price ceiling and price floors. Price ceiling refers to the maximum price, and price floors indicate the minimum price chargeable for the specific goods and services.
• It is used to fight inflation, deflation, consumer exploitation, etc.
• “Nixon shock” is one of the examples of a government imposing price restriction strategies to fight inflation.

Price controls are an example of economic interventionism by the government using economic policies to interrupt market forces. For example, the government may raise or reduce the standard prices of products and services, disregarding the equilibrium prices. However, it will help the government in different ways, like to attain price stability and steer clear of inflation and deflation.

It's an important tool to many economies, like how they use interest rates, open market operations, and reserve requirements to influence movements in the economy. Also, this type of control measure helps the government to curtail the negative impacts of their policies. For example, lowering interest rates pave the way for inflation, and in such a situation, the government can impose price control measures to stop inflation.

The Nixon Shock exemplifies using price restrictions as a key method against inflation. It is the name given to a set of economic policies undertaken in the United States by President Richard Nixon in 1971 to curb inflation and wage escalations. The president announced that all prices and wages in the United States would not change for three months. Nixon's pricing controls were effective for a time. However, Nixon's price controls phase II imposed highly complicated requirements, which were disliked by the public.

Let's consider the measures adopted by China recently to present price controls example. China's price controlling efforts are not confined to a few industries. It includes measures covering different sectors like power and agriculture. All these intended policy changes point to the scaling up of control measures in the economy.

One of the measures includes China's plan to deal with the abnormal fluctuations by adopting policies to fix iron ore, copper, corn, and other major commodities prices. Therefore, it will reflect the 14th five-year plan for 2021 to 2025. In addition, China will also focus on the pricing of commodities like crude oil, soybean, etc., reasonably adjusting cotton target price levels and checking whether entities are following the country's minimum purchase price policy framework for rice and wheat. Hence building a solid grain supply and stabilizing prices to guarantee food security in the nation.

The government sets prices to ensure that specific goods and services are sold fairly to every citizen. Price controls on goods can be set by two types: price ceiling and price floor. It forms a bracket where one is the maximum price and the other is the minimum price. The producers and sellers must ensure that they cannot go further or below that.

#1 - Price Ceiling

Price ceiling refers to the maximum price authorized by the government for certain goods and services, letting the seller charge. A price ceiling scenario is common in regions where the demand for goods and services is high and the supply low. As a result, the maximum price decided by the government is usually a price lower than the equilibrium price.

#2 - Price Floors

Contrary to a price ceiling, a price floor refers to the government setting the minimum legal price of certain goods and services. If the price floor is set, a buyer will not be able to buy the product at a price below the price floor in a standard setting. It ensures the protection of producers from scenarios entailing features like low demand, excess supply, under-pricing or below-cost pricing, etc. 

The controlling measures often entail positive and negative impacts. Let's look into some of them.

Pros:

• Consumers’ interest: The price ceiling ensures the affordability of consumer products, specifically consumer staples. For example, setting an upper limit for maximum rent chargeable eliminates the exploitation of tenants or rentee by landlords.
• Producers’ interest: The price floor protects many sectors from suffering losses due to low prices due to excess supply or low demand. For example, this strategy protects people like farmers and protects their right to receive the rightful compensation. 
• Fair competition: Encourage sellers to participate since the policies reduce price manipulations actively. Hence it enhances healthy competition.
• Fight inflation: It reduces the inflation rate.
• Fight deflation: It decreases the deflation phenomenon and protects the economy from depression. For example, when the U.S. government adopted price control measures during World War I and II, it helped them revive in the period of the great depression.
• Stop monopolies: Restrict the formation of monopolies.

Cons:

• Shortages and excess demand: If the government set price ceiling is below the equilibrium price, the chance of an increase in demand is high; hence it will lead to a scenario of excess demand or inadequate supply. Inadequate supply can lead to rationing and the generation of parallel markets.
• Excessive supply and lesser demand: In most cases price floor for a product is greater than its equilibrium price formed by supply and demand forces. Hence it automatically leads to a situation of excess supply and low demand. 

This has been a Guide to What is Price Control in Economics & its Definition. We explain price controls on goods, examples, Nixon shock, types, pros & cons. You can learn more from the following articles – 

• Price Efficiency
• Rent Control
• Price Fixing