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What are Price Controls?


The term 'Price Controls' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Price Controls turn out to be government decreed standards for maximum or minimum prices which they set on specific goods. These are typically put into place in order to intervene directly in an economy so they can arrange for essential goods to be made affordable. Governments are interested in affecting these controls on staple goods. These include such critical things as foodstuffs and energy. Within these types of controls, price ceilings are those which decree maximum prices which can be charged, at the same time as price floors are such controls which determine minimum prices.

Governments have a lengthy sordid history with attempting to implement price controls. Their attempts have demonstrated that the effects of these measures work only effectively for short time frames. In the long run, such controls always cause great difficulties like rationing, shortages, poor quality product declines, and black market transactions which become popular as an alternative means of providing the goods which are price controlled via unofficial distribution systems.

As prices are alternatively set by free market forces of supply and demand, the prices naturally rise and fall in order to maintain the equilibrium between such demand and supply. There has never been a successful effort by governments over the long term to defeat the all powerful forces of supply and demand. Governments which impose their controls end of creating either too much demand when price ceilings are established or too much supply when price floors are enacted. As a method of government intervention, these controls have been proven to never work in practice, even when governments have established them with the very best of end goals.

Examples of failed and botched efforts at price controls abound in the United States. Rent controls are a classic example of these and how ineffective they usually are. New York City widely implemented such rent controls to try to enable a sufficient supply of housing which is affordable. The real world impact has actually been to lower the total supply of rental units. This has caused still higher costs for rental in the rental housing market.

The true net effect of such rent controls has been that they discouraged entrepreneurs in real estate from getting into the landlord business. It has led to a supply crisis which means that a significantly lower amount of rental housing is now available than would have been the case if they had simply left the free market forces to work out the fair prices. Another problem that has arisen from these rent controls is that landlords do not have the necessary motivation to improve the rental properties or even to properly maintain them to an acceptable standard for the tenants. This has caused a significant deterioration in the quality of the available rental housing stock as well.

The U.S. also implemented price controls in the wake of the Japanese bombing of Pearl Harbor, Hawaii, which led to the outbreak of World War II in America. The feds began to expand existing controls and to establish new ones to preserve the critical elements of the economy. President Franklin D. Roosevelt on January 6, 1942 detailed his new production goals which were necessary to support the war effort he claimed. Practically all of the national economic industries were placed ever increasingly under direct control of the government.

Economists are typically dead set against these types of controls, but everyone agreed this was a national state of emergency at the time. To do this more effectively, the Federal Government created the agencies like the Office of Price Administration (OPA) and the War Production Board (WPB) in 1942 to help boost overall production output and to control prices and wages as well.

The National War Labor Board arose as the result of President Roosevelt’s executive order on January 12, 1942. This implemented price and wage controls along with the firing and hiring of employees. This agency approved increases to wages and adopted what became known as the Little Steel formula to make wartime changes because of the increasing cost of living.

A final recent example of such botched price controls centered on the Nixon administration implementation of controls on gasoline products. This finally caused massive supply shortages, rationing of fuel, and lengthy, tedious lines at gas stations.

The term 'Price Controls' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.