Price Controls

As the name suggests, ‘Price Controls’ is a set of mechanisms used to check equilibrium price in an economy. The government intervenes to alter the equilibrium price that has been obtained by the market mechanism of demand and supply. When the government finds the price of a commodity to be too low, it sets a ‘Price Floor’ while, when it finds the price to be too high to be charged, it introduces a ‘Price Ceiling’.

Price Floor is a minimum price that needs to be charged in the market for a particular commodity, no matter the intersection point (equilibrium price) of its demand and supply lies above or below it. A price floor becomes ineffective when the equilibrium price lies above the price floor and fully efficient in the opposite case. Therefore, the government puts a price floor in markets where it finds the equilibrium price to be very low. The beneficiaries are the suppliers while the consumers suffer a loss. Obviously, the market becomes inefficient and there is excess supply in the market. There is also a dead-weight loss associated with a price floor. Either the government buys the extra quantity of the good from the suppliers or provides them subsidy for compensation. Another way to set a price floor is to set a production quota or provide attractive incentives to reduce production, which in turn raises prices.

Price Ceiling, on the other hand, is the maximum price that the government sets for a commodity in the market. The equilibrium price must lie above the price ceiling to make it efficient. Hence, when the government finds unfair high prices in the economy for a good, it puts a price ceiling and makes the consumers better off. Here, the suppliers are made worse off because of the lower prices. There is excess demand for the good. The inefficiency in the market might lead to government rationing or forming consumer queues. It also might lead to black marketing and hording.

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