Price Control Mechanisms

PriceControl Mechanisms

Ina free market economy, the forces of supply and demand determine theprice of goods and services. However, in this kind of a market, thegovernment has to intervene through various mechanisms, in order toensure that three things are running smoothly in the economy. The U.Sgovernment intervenes in the economy to first make sure that there isno market failure, and this may result as a result of prices beingcharged too high or too low in the economy. Market failure can leadto goods either being too expensive or too cheap in the economy.Secondly, the government intervenes in the economy to ensure that,there is the existence of equitable distribution of wealth and incomein the economy. The geographical disparities of regions in a nationguarantee that each region has a comparative edge against anotherregion thus leading to unequal distribution of goods and services.Therefore, there is the need for government to step in with the aimof elevating such a situation. Finally, the government has tointervene in a country’s economy in order to ensure that theeconomy performs well. It is notable that, consumers suffers if thenational economy underperforms and it’s the government’s duty toensure that all sectors of the economy are functioning well so thatthe economy can grow. One of the government interventions that isusually applied by the government includes the use of price controlmechanisms. A price control is a government’s intervention onmarket prices, in order to protect both the producers or suppliersand the consumers (Rockoff 1). Government price control mechanismsare usually common in a range of sectors of the economy likeagriculture and housing which are vital to the economy. Thegovernment seeks to protect the producers by ensuring that they areguaranteed of making returns from their crop, while the country doesnot suffer from food shortage through price floors (Rockoff 1). Onthe other hand, the government ensures that consumers are protectedby making sure that, they are not charged too much for goods andservices through the use of price ceilings. In this essay, the authorwill highlight the effects of the government use of price controlmechanisms in the economy.

Priceceilings are governments price mechanism control aimed at protectingthe consumers. The government usually sets up price ceilings toensure that the consumers are not charged too high or pay too muchfor goods and services. While price ceilings do in fact protect theconsumers from paying too much, there is a downside to this pricecontrol mechanism (PriceCeiling Impact on Market Outcome).According to a free enterprise system of economy, the forces ofdemand and supply ultimately determine the prices of goods andservices. However, with government intervention, disequilibrium islikely to occur as price ceilings usually lead to a shortage in thesupply of goods and services. This is brought by the fact that, themarket is not allowed to determine the prices of goods and serviceson its own. Therefore, what ends up happening is that, the producersof goods and services end up producing low levels of goods andservices due to the fact that they can only charge too much.Consequently, the suppliers of goods and service are less motivatedto supply their goods or services, since they cannot get maximumreturns as the prices are already predetermined by the government.Price ceilings imposed by the government usually lead to fourpossible negative outcomes.

Imposinga price ceiling will always lead to market inefficiency. A priceceiling has no direct effect on the economy if the price is above themarket price. However, if the market price is set below the marketprice, a shortage is always imminent. A shortage in supply is alwayscreated when the ceiling is below the market pricebecauseonly a few goods will be produced. Only a few producers will bewilling to supply their goods at a lower price, therefore this willlead to a shortage in the market, meaning that the demand forproducts will be higher, but then the producers would be less willingto supply the products due to lower prices.

Secondly,price ceilings usually lead to a deadweight loss. A deadweight lossis a net decrease in the total economic surplus. This occurs becauseprice ceilings lower the prices of goods which reduce the producersurplus. The producer surplus is the amount of extra money theproducers get from selling goods at a higher price. The consumersurplus on the other hand, is the benefit obtained by consumers frombuying a product at a price which is lower than they would be willingto pay. The net effect is that, the producers end up losing moremoney than they would have, since the consumers pay less and theproducers earn less money from their business transaction. This leadsto a deadweight loss.

Rationingis the third negative effect of using price ceilings. Since thereexists a shortage in the economy, only a few consumers in the marketcan access goods and services. If the price ceilings are imposed fora long duration of time, the government can only issue tickets toconsumers. Queuing for good and services by the consumers is the onlyalternative that will ensure consumers are allocated goods on a firstcome first serve basis. The government in turn will also ensure that,the goods that are in the market equal the number of tickets held byconsumers. In order to obtain goods, consumers have to present theirmoney and tickets to the vendor before making a purchase.

Prolongedshortages and queues usually lead to the emergence of black markets.Black markets are illegal markets where consumers purchase goods andservices that would be controlled. The consumers however end uppurchasing good and services at a higher price than they would havein a legal market. The goods bought on the black market are also oflower quality than those sold in the legal market, and this isbecause some unscrupulous business men would like to take advantageof the shortage that exists in the market. Black markets areparticularly common for durable goods and drugs. The implications ofbuying substandard drugs are dire but then the consumers, but arenecessary to the consumers since this is crucial for their survival.Black market participants face risks of violence and theft, since thegovernment does not have a regulatory framework that would protectthem.

Pricefloor are enacted by governments to protect the suppliers or evenproducers of goods and services. By imposing price floors, thegovernment ensures that producers or suppliers at least get enoughmoney to cover for their expenditure costs. This price mechanism alsoensures that, there are no shortages in the market since theproducers are guaranteed returns on their investment by thegovernment. In most cases, the government ends up purchasing theproducts at a minimum price set up by the government. Though thismethod may lead to losses by the government, at least it ensures thatthe country has enough resources and that chances of having ashortage are minimized. Therefore, whenever a price shortage iseffected by the government, a surplus is one of the predeterminedoutcomes. The use of price floors is particularly evident in theagricultural sector where the government guarantees payments tosuppliers, in order to avoid a drought or possibly a famine (PriceFloor Impact on Market Outcome).Price floors also come in handy in protecting the employees. Itguarantees them some minimum wage.

Pricefloors have no direct effect on the market if it is below the marketprice. However, if the price floor is above the market, then asurplus is created. When a surplus is created, two things mightpossibly occur. First, there is the possibility of having adeadweight loss. This occurs since there is a net decrease in thetotal economic surplus, as consumers are able to purchase the goodsat a less price than they would willing to pay. The producers wouldbe selling their good at a higher price. This gives rise to a netdecrease in the economic surplus.

Pricefloors are usually used by governments to protect suppliers of laboror employees. Minimum wage laws are usually enacted to protectemployees from being exploited by their employers. However, the pricefloors lead to unemployment when the minimum wage rate is above themarket rate. In such a case, low skilled workers may enjoy higherwages, but other may lose their jobs hence unemployment.

Fromthe above, it is clear that, while none of the price controls isbetter than the other one, price ceilings seem to have more negativeeffects to the economy when compared to the price floors. However,government interventions in the economy bring ineffectiveness andinefficiencies to the economy to some extent, but at least at the endof the day, the economy of a country wins.

WorksCited

Boundless.“Price Ceiling Impact on Market Outcome.” BoundlessEconomics.Boundless, 03 Jul. 2014. Retrieved 05 Dec. 2014 from

https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introducing-supply-and-demand-3/government-intervention-and-disequilibrium-49/price-ceiling-impact-on-market-outcome-184-12282/

Rockoff,Hugh. Price Controls. TheConcise Encyclopedia of Economics.2014.Web. Available at

http://www.econlib.org/library/Enc/PriceControls.html