Price controls

1. Governments intervene when they judge the free-market price to be too high for consumers or too low for producers.
2. A maximum price (ceiling) is a legal limit set below equilibrium to keep essential goods affordable.
3. A minimum price (floor) is a legal limit set above equilibrium to support producers or discourage harmful consumption.

Maximum prices

1. A maximum price aims to protect consumers when the equilibrium price is unaffordable.
2. Because it sits below equilibrium, quantity demanded exceeds quantity supplied.
3. The result is a shortage, or excess demand, because the low price cannot ration the good.
4. Rationing, queues or black markets then emerge to allocate the scarce supply, so some consumers gain cheaper goods while others get none.

Minimum prices

1. A minimum price aims to support producers' incomes or to discourage harmful consumption.
2. Because it sits above equilibrium, quantity supplied exceeds quantity demanded.
3. The result is a surplus, or excess supply, because the high price attracts output that buyers will not take.
4. The government may then have to buy up and store the surplus, at a cost to taxpayers.

Effect on the price mechanism

1. Controlled prices stop the market from clearing at equilibrium.
2. They distort the signalling and rationing functions of the price mechanism, so resources are no longer allocated to their highest-valued use.
3. This leaves a persistent shortage or surplus rather than a one-off adjustment, so whether the control is worthwhile depends on weighing the protected group against the distortion created.

Do price controls do more harm than good?

1. A binding control does protect its target group, because a rent ceiling lets low-income tenants who secure a flat pay less, and a wheat price floor gives farmers a higher, more stable income.
2. However, because the price can no longer clear the market, the control leaves a persistent shortage or surplus, and a ceiling in particular breeds queues, waiting lists and black markets that can leave the poorest with nothing at all.
3. The distortion is larger the further the control sits from equilibrium and the more inelastic the market, and a floor forces the government to buy and store surpluses at a taxpayer cost, so the policy carries real efficiency and fiscal costs.
4. On balance, a price control can be justified where the equity gain to a protected group is large and the good is essential, but whether it does more good than harm depends on how far it lies from equilibrium, the elasticities of demand and supply, how long it stays in force, and whether a subsidy or direct provision would correct the problem with less distortion.