What is the result of government price controls?

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According to economic theory, the result of government price controls is either a surplus (if the government imposes a price floor) or a shortage (if the government sets a price ceiling).  Either way, there is an inefficient result and things would be better if the government would refrain from trying to control prices.

One way of controlling prices is to prevent them from dropping too low.  Governments do this, for example, by guaranteeing certain prices for agricultural products.  They do not want farmers to have economic problems so they prevent prices from dropping.  This encourages farmers to plant more of the crop in question because they know they will get a high price for it.  At the same time, it discourages consumers from buying as much of the crop because the price is higher than the consumers would like.  This means that supply is greater than demand and prices are not allowed to drop to create an equilibrium.  This situation results in a surplus of the particular crop.

Governments can also impose price ceilings.  One example of this comes when governments try to cap the price of something that people need to use, like gasoline.  The government hopes to improve people’s lives by making a vital good less expensive.  When the government sets an upper limit on price, it causes people to want more of the good.  The good is cheap, so people are able to buy more of it.  At the same time, however, the low price means that it is less profitable to sell the good.  Suppliers are not eager to sell at low prices so supply is low even as demand is high.  This situation results in a shortage of the good.

Thus, when governments control prices (economists say) bad things happen.  In some cases too much of a product is produced while in other cases not enough is produced.

 

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