Price Controls

Econ 360-002

Sonia Parsa

Sparsa1@gmu.edu

G00509808

Word Count: 1540

Abstract

This paper examines how, in the United States, the government

imposes several forms of taxes and price controls and how all

individuals are required to pay direct and indirect taxes. It looks at how

the approach of taxation and how the constraints of taxation on goods

and price controls highly affect the U.S. economy.

Introduction

Regulations have played a huge role in the political and

economic world for centuries. There are various different types of

regulation. One regulation that the government imposes under its tax

policy is price control, which is not considered to be voluntary. Price

control can play two different roles, a price ceiling or a price floor. A

price ceiling is the maximum price that can be charged in the market

for a certain good, causing shortages, and a price floor is the minimum

price that can be charged in the market, which then causes surpluses.

Measures are taken by a government under its regulatory policy to

control wages and prices in an attempt to check cost-push inflation and

wage-push inflation. Governments also impose price controls as an

indirect mechanism for taxation. The most well-known price controls

enforced by the United States government today are: the policy of

minimum wage, rent control, and oil price control. Having enforced

price controls generate opportunities for economy failure and

international arbitrage.

Argument

When a price control is forced by the government, it’s usually

imposed to help or protect particular parts of the population which

would be treated inequitably by the unfettered price system. But one

must wonder which part of the population, the consumers or the

producers? Is it not true that the consumers always feel as if the prices

of a good are much higher than their actual value, while producers

always feel as if the prices are too low? Price controls are usually

justified as a way to help consumers, but whether they actually do is

open to debate. Imposed price controls by the government are not

only an absolute disaster, but have resulted in dislocating many

economies all over the world for thousands of years. The key is to

recognize that governments that when governments impose price

controls, it does not only effect their nation, but also effects parallel

imports with their trade partners because of a price “discrimination.”

Price controls, wage controls, and money controls are really

people controls. Regimentation at its worst- that is what a socialist

dictatorship is all about. Isn’t the United States a Constitution-based

federal republic? The Declaration of Independence declares the

purpose of Government is "to secure these Rights", these unalienable

rights such as Liberty. You cannot have a free country like our

Founding Fathers wanted with wage and price controls. The

government is imposing slavery upon people who have been given

economic freedom.

Evidence

The effect of taxation and price controls on the economy vary

from the decrease of the supply of goods to an increase in costs and

can be demonstrated by a supply-demand analysis (Figure 1).

 In a free market, the average selling prices is shown by an

upward sloping supply curve (S) with respect to price. The maximum

buying prices on the part of the consumer is then shown by a

downward sloping demand curve (D) with respect to price. After a

quantity of a good is acquired by a consumer, the less important the

desire is than before. Therefore, the supplier has to lower the price for

each unit as it is sold. Where the supply and demand curve intersects

at the margin is called the equilibrium price. In a maximum price

control, a deadweight loss occurs in the triangle of a, b, c.

For example, when there is a tax imposed on a good like

tobacco, there is an increase in the price of the product. This is called

minimum price control and the price is not legally allowed to fall below

the minimum. This shifts the supply curve of the product to the left. In

other words, there are fewer goods available at the same prices than

there were before. There is then a decline in the quantity demanded

and a new equilibrium between demand and supply is reached. On the

other hand when price controls are imposed there is an artificial

decline in the prices. At the lower prices, a higher quantity is

demanded but the production is insufficient to fulfill that demand and

causes a shortage.

Price controls send out mixed information to consumers and

producers. When the price of a good goes up, it signals to the

consumer that the good is scarce. However, at the same time, it is

telling the supplier that the good is a high demand good and to

produce more. This inconsistency creates a surplus and then later

evokes a price cut to clear in the equilibrium.

If a maximum price control is instituted, the price is set

artificially below the market clearing price. It would not be legal to sell

or buy above the price that is set. This also sends out mixed

information to the consumers and producers. It portrays that the good

is held at a low value and that the suppliers should produce less. On

the other hand, the price of the good tells consumer that there’s an

excessive amount and to consume it. This inconsistency leads to a

shortage and creates chaos in a free-market.

We can also use the supply-demand analysis to dissect the labor

market when a wage-control is placed by the government (shown in

Figure 2). By establishing a minimum-wage law, it mandates a price

floor above the equilibrium wage; therefore, the rate of unemployment

among unskilled workers increases. When wages increase, a greater

number of workers are willing to work while only a small number of

jobs will be available at the higher wage. Companies can be more

selective in whom they choose to employ causing the least skilled and

inexperience to be excluded.

Figure 2 assumes that workers are willing to work for more hours

if paid a higher wage. We graph this relationship with the wage on the

vertical axis and the quantity of workers on the horizontal axis.

Combining the demand and supply curves for labor allows us to

examine the effect of the minimum wage.

We will start by assuming that the supply and demand curves for

labor will not change as a result of raising the minimum wage. This

assumption has been questioned. If no minimum wage is in place,

workers and employers will continue to adjust the quantity of labor

supplied according to price until the quantity of labor demanded is

equal to the quantity of labor supplied, reaching equilibrium price,

where the supply and demand curves intersect.

If a country has a price control set on a specific good and the

price is lower than another country with which they trade with, it

violates the local owners’ intellectual rights which results in parallel

trade. The propriety of parallel trade is a matter which has been

intensely debated in a number of countries and in the World Trade

Organization. Assume Government A is trading to Government B;

Government A has placed a price control on a good to $10/lbs,

Government B has not and the price of a good is at $6/lbs, and the

production price is $4/lbs. According to Figure 3, Government A would

never set a price below c because it would not serve B’s

Figure 3
market to have prices below marginal production cost; the higher the

price, the more profit. However, people from A will go and purchase

from B because of the difference in cost and personal trafficking will

increase, thus making the good no longer able to be taxed by

Government A.i

Conclusion

Obligatory price controls by the government are not only an

absolute disaster, but have resulted in dislocating many economies all

over the world for thousands of years. As economic history has shown

us, price controls being effective in a free competitive market are very

rare. We either experience shortages or surpluses as a result. Who

wins and who loses with an imposed price control? Setting a price

control in one country affects other countries around it as well due to

parallel imports and personal trafficking.

Prices are not just numbers to a free competitive market; they

are the expression of the value the supplier believes to be fair, no

matter how subjective it may be. To regulate or to impose a price

control, like any form of regulation, is unconstitutional. In some cases,

it either violates the 5th amendment and/or 14th amendment. Price

controls, wage controls, and money controls are really people controls.

Regimentation at its worst- that is what a socialist dictatorship is all

about.

I believe that the economy has its own way of equalizing its

economy and when the government interferes and sets price ceiling or

price floor, it causes a chaos within our economy. Regardless if it is

dead weight loss or there is a shortage, the consequences can

sometimes be more destructive in the long run. Even if a government

believes that price controls are set and affect only their country, it

doesn’t; it affects every nation that does any trade with them, exports

or imports.
i
Grossman, Gene M., and Edwin L-C Lai. "Parallel imports and price controls." RAND Journal of
Economics 2nd ser. 39 (2008): 378-402. Princeton. Web. 8 Dec. 2009.
<http://www.princeton.edu/~grossman/ParallelImports.pdf>.