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Price Controls - Essay Example

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This paper will try to analyze the problems associated with price controls. Price controls are government interventions in the economy used to regulate prices. The intention behind developing price controls is to retain the affordability of products, prevent price increases during shortages…
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Price Controls
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Price Controls

Download file to see previous pages... Price ceiling refers to the highest amount that can be charged for a product. Ceiling price controls determines the highest prices that might be charged for a particular commodity but do not limit transactions at lower prices below the ceiling price. On the other hand, price floor is the minimum amount charged for the product. However, just like in the case of price ceilings, price floor controls do not limit transactions at higher prices above the floor price (Newberry, 09). The government agency may be encouraged to fix and enforce the exact prices for which certain commodity or commodities may be sold. Alternatively, the government through the agency-as discussed above-might decides to set ceilings and floor prices for particular goods or services.
The market prices determined by the interaction of the demand and supply curves are the basic building blocks for most economies. Consumers taste for a commodity will determine how much of the product they will be willing to buy at a given price. Consumers tend to buy more of a commodity as its prices declines (Newberry, 87). Companies in turn, decide on how much they will be willing to supply to the market at different prices. If consumers agree to pay more for a commodity, then more suppliers will be tempted to produce the product. The increased prices motivate manufacturers to increase their production capabilities by conducting research to improve the quality of the products. Therefore, the supply of goods in the market increases with an increase in the product’s price (Wise, 32). This dynamic interaction provides the equilibrium market price of the commodity where sellers and buyers can transact freely.
The price that results from this interaction causes the quantity of goods being demanded by customers to be equal to the supply produced by manufacturers. In most countries, the government is going through hard times trying to control prices for some commodities. For instance, one of the critical issues that were facing American citizens by the year 2001 was how to manage prescription drug prices, particularly for senior who depend on Medicare coverage. Some policy makers at the time tried to encourage the government to directly contract with drug manufacturers to purchase drugs for the seniors-at the government set prices. However, despite numerous attempts by the policy maker, that kind of price control proved to be harmful to the American citizens. Considering the above example and many other similar cases, this paper will try to analyze the problems associated with price controls (Wise, 145). 2. Constitutional Issues affecting Price Control It is a common practice that every government will always gain favor from the voters and its constituents when it lowers prices of any popular commodity (Age?nor and Carlos, 89). That is, prices to some extent limit the welfare of an individual as it will reduce the amount of products consumed. Therefore, lowering the price will definitely increase the welfare of consumers especially if the prices are for popular good within a country. The government also gains favor from firms and lobbyists when it raises prices of some goods-that will earn them profits. Given these benefits to policymakers, you should not be surprised on discovering that price control is a common practice in history of most Western economies (Age?nor and Carl ...Download file to see next pagesRead More
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