Price Control Law - Essay Example

Price Control Law Prices control laws are enacted by the government to enable set maximum and minimum restrictions on prices of goods and services. The main aim of introducing price controls is to maintain affordability of the country’s staple food and basic goods to the hard pressed social economic individuals in the society (Rockoff, 66). Price control law protects consumers from price gouging in times of shortages when inflation is probable. This is an argumentative essay discussing the price control law and the importance of protecting consumers against price gouging in the market. Price control policies in history were put in place as portion of a larger income policy package while inducing wage controls as regulatory element. Price control takes two forms, a ceiling price (maximum) and the floor price (minimum) that can be charged in a market. These two forms of price control act as a regulatory element during shortages to prevent from market inflation (Rockoff, 67). The application of price control is comprehensible. However, price controls fail to safeguard many consumers and offend others. Controls hold out the promise of protecting individuals that are struggling to meet increased price. Therefore, the prohibition against moneylending, charging high interest on loans, is projected to protect individuals who are obligated to borrow out of desperation. For instance, the maximum price for bread was theoretical to protect the have-nots, who relied on bread for their survival. The rent controls were proposed policies to protect those who were renting when the demand for houses exceeded the supply thus; landlords were getting ready to “gouge prices” to their tenants (Stern, 140). Despite the appeal of frequent use of price controls, economists opposed them except in times of emergencies. According to statistics of 1992, 76.3% of the economists interviewed agreed with the slogan, “A ceiling on rents reduces the quality and quantity of house available.” An extension of 16.6% agreed with qualifications, and only 6.5% disagreed with the statement. Similar results were observed when the economists were interviewed about price controls: 8.4% agreed with the report: “Wage-price controls are a useful policy option in the control of inflation.” An extra 17.7% agreed with the results; however majority of the economist disagreed with the statement by 73.9% (Rockoff, 82). The main cause why majority of economists are cynical about price control is that they alter the allocation of resources. Remark made by an economist Milton Friedman, states that economist may not know everything but they understand how to produce a shortage or surplus to a market (Rockoff, 83). Price ceilings prevent prices from going beyond a certain maximum price, causing shortages. Price floors prevent prices going below a particular minimum point which eventually causes surpluses for a specified period. For example, if the supply and demand for wheat flour is at a stable current price, then the government allocates a lower maximum price. The supply of flour will decrease while the demand increases. This will result to excessive demand with limited supply. However, some consumers will enjoy purchasing flour at the lower price while others will be mandated to do without. To be functional, price floor must be established if it exceeds the equilibrium price. If it is not above equilibrium, then the market will not retail under equilibrium and the price floor will be unstable (Lynch and Robert, 82). The government can establish protocols and laws to curb price floor repercussions. For instance, the U.S. government purchased surpluses grain in the US and then donated all the grain to Africa. This might have been a relief for African customers, but it destroyed the African market. The government can harshly establish the price floor and let the surplus to be discarded. This embodies that the suppliers are capable of selling their goods and are better off, while those who cannot sell their goods will be worse off. In another instance, minimum wage laws mean that some laborers who are ready to work at a lower wage do not get to work at all. Such laborers make up a quota of the structural unemployed. To prevent a lot of suppliers in the market, the government can control how much is being produced. To control floor prices, the government can also subsidize cost of goods purchased to entice consumers to buy the more surplus (Lynch and Robert, 82). Other mechanisms have taken place due to price control that prohibits the price system from rationing the existing supply (Stern, 143). A queue possibility was a familiar example in the controlled economies of Eastern Europe. For instance, United States setting a maximum price for gasoline in 1973, dealers sold gas on the basis of first-come-first-served. This forced drivers to wait in long queues to buy gasoline. The original price of gasoline was inclusive of the cash paid, and the time spent waiting in queues was higher than it would have been if the price had not been controlled. Some of the gasoline was withheld for close friends, long-term customers, the politically connected, and individuals who were willing to pay extra cash. The motives to evade price control are limitless. The form of evasion depends on the nature of goods or service, the organization of the company, the degree of government enforcement (Brunner and Allan, 101). Deterioration of quality is among the simplest forms of evasion. For example, in the United States, fat was added to hamburger, candy bars made were reduced to small sizes and of substandard ingredients and landlords lessened their maintenance of rent-controlled houses. The government can attack the deterioration of quality by issuing specific product standardization through oversight and enforcement by government agencies. Indirect forms of evasion include the tie-in sale. Buying of wheat flour at the true price during World War I, consumers were often obligated to procure unnecessary quantities of rye or potato flour. Another form of evasion is “Forced up-trading”. Take for example a manufacturer who produces low-quality, low-priced line sold in a large amount at a small markup, against a high-priced, high-quality line sold in small volumes at a high markup. When the government introduces price ceilings and effects result to a shortage of both lines, the manufacturer may terminate the lower-priced line, thus resulting to the consumer to migrate to the higher-priced line (Rockoff, 71). The costs imposed through queuing, evasion, and black markets lead governments to enforce some form of restrictions. Rationing assisted to resolve shortage complications created by controls (Maskus and Yongmin, 560). Rationing assisted producers not to divert their supplies to the black market since they are obligated to have ration tickets to tie their production. On the other hand, distributors no longer have as much reason to accept bribes or demand match purchases. Consumers have a smaller reason to pay high prices as they are assured of a minimum amount. Rationing increases integrity and efficiency of price controls. General Price control is often carried out when the public panics that inflation is out of control. Inflation may result into panic buying, strikes, animosity toward racial or ethnic minorities who are alleged to be profiting from inflation. Price control may however make a constructive influence by calming these panics (Lynch and Robert, 84). Often, inflation is perceived as inflationary monetary rather than panic buying. Wartime controls are viewed as an extension to suppress price increases produced by monetary and fiscal policies. Price control only delays the day of calculation and changing what would have been a stable inflation into a period of slow inflation followed by a quick inflation. When price control is terminated, the hidden inflation is exposed. In conclusion, the problem associated with general controls is the trade-off between the necessity to have a simple package perceived as fair and the prerequisite for adequate versatility to maintain efficiency. The creation of a fair appearance requires holding maximum prices constant, but efficiency entails making frequent changes. However, the adjustments of true prices, focuses the government in administering controls to a bombardment of lobbying and complaints of unfairness. Works Cited Brunner, Karl, and Allan H., Meltzer. The Economics Of Price And Wage Controls. Amsterdam: North-Holland Pub. Co. ; New York : sole distributors for the U.S.A. American Elsevier Pub. Co., 1976. 101-103. Print. Lynch, John A., and Robert. M, Shrum. Wage And Price Controls. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1970. 82-84. Print. Maskus, Keith E., and Yongmin Chen. "Vertical price control and parallel imports: theory and evidence." Review of International Economics 12.4 (2004): 555-560. Print. Rockoff, Hugh. Americas Economic Way Of War. Cambridge: Cambridge University Press, 2012. 82-83. Print. Rockoff, Hugh. Price Controls. Aldershot, Hants, England: E. Elgar Pub. Co., 1992. 66-71. Stern, Nicholas. "The effects of taxation, price control and government contracts in oligopoly and monopolistic competition." Journal of Public Economics 32.2 (1987): 133-158. Read More