Price controls

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World War I poster of the United States Food Administration "Prices charged in this store will not exceed those indicated in the most recent list of Fair Prices applicable to this - NARA - 512556.jpg
World War I poster of the United States Food Administration

Price controls are restrictions set in place and enforced by governments, on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of goods even during shortages, and to slow inflation, or, alternatively, to ensure a minimum income for providers of certain goods or to try to achieve a living wage. There are two primary forms of price control: a price ceiling, the maximum price that can be charged; and a price floor, the minimum price that can be charged. A well-known example of a price ceiling is rent control, which limits the increases that a landlord is permitted by government to charge for rent. A widely used price floor is minimum wage (wages are the price of labor). Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements.

Contents

Although price controls are routinely used by governments, Western economists generally agree that consumer price controls do not accomplish what they intend to in market economies, and many economists instead recommend such controls should be avoided. [1] However, since the credibility revolution starting in the 1990s, minimum wages have found strong support among some economists. [2] [3] [4] [5]

History

The maximum retail price (MRP) of this bottle of water in Sri Lanka is 90 Rupees Maximum Retail Price Sri Lanka.jpg
The maximum retail price (MRP) of this bottle of water in Sri Lanka is 90 Rupees

The Roman Emperor Diocletian tried to set maximum prices for all commodities in the late 3rd century AD but with little success. In the early 14th century, the Delhi Sultanate ruler Alauddin Khalji instituted several market reforms, which included price-fixing for a wide range of goods, including grains, cloth, slaves and animals. However, a few months after his death, these measures were revoked by his son Qutbuddin Mubarak Shah. [6] During the French Revolution, the Law of the Maximum set price limits on the sale of food and other staples.

Governments in planned economies typically control prices on most or all goods but have not sustained high economic performance and have been almost entirely replaced by mixed economies. Price controls have also been used in modern times in less-planned economies, such as rent control. [1] During World War I, the United States Food Administration enforced price controls on food. [7] [8] [9] [10] Price controls were also imposed in the US and Nazi Germany during World War II. [11] [12]

Postwar

Wage controls have been tried in many countries to reduce inflation, seldom successfully. Modern neoclassical economic theory supports the alternative remedy of reducing the money supply and proposes that monetary inflation is caused by too much money creation by the central bank.[ citation needed ]

United Kingdom

The National Board for Prices and Incomes was created by the government of Harold Wilson in 1965 in an attempt to solve the problem of inflation in the British economy by managing wages and prices. The Prices and Incomes Act 1966 c. 33 affected UK labour law, regarding wage levels and price policies. It allowed the government to begin a process to scrutinise rising levels of wages (then around 8% per year) by initiating reports and inquiries and ultimately giving orders for a standstill. The objective was to control inflation. It proved unpopular after the 1960s.

United States

In the United States, price controls have been enacted several times. The first time price controls were enacted nationally was in 1906 as a part of the Hepburn Act. [13] [ page needed ] In World War I the War Industries Board was established to set priorities, fix prices, and standardize products to support the war efforts of the United States. During the 1930s, the National Industrial Recovery Act (NIRA) created the National Recovery Administration, that set prices and created codes of "fair practices". In May 1935, the Supreme Court held that the mandatory codes section of NIRA were unconstitutional, in the court case of Schechter Poultry Corp. v. United States .

In 1971, President Richard Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices. The constitutionality of this action was challenged and upheld in the case of Amalgamated Meat Cutters v. Connally [14]

The individual states have sometimes chosen to implement their own control policies. In the 1860s, several midwestern states of the United States, namely Minnesota, Iowa, Wisconsin, and Illinois, enacted a series of laws called the Granger Laws, primarily to regulate rising fare prices of railroad and grain elevator companies.

The state of Hawaii briefly introduced a cap on the wholesale price of gasoline (the Gas Cap Law) in an effort to fight "price gouging" in that state in 2005. Because it was widely seen as too soft and ineffective, it was repealed shortly thereafter. [15]

A World War II-era shop display promoting price controls. Domestic Price Control - NARA - 195924.jpg
A World War II-era shop display promoting price controls.

Venezuela

According to Girish Gupta from The Guardian , price controls have created a scarcity of basic goods and made black markets flourish under President Maduro. [16]

India

In India, the government first enacted price control in 2013 for the Drug Price Control Order (DPCO). This order gave local regulatory body, and the Pharmaceutical Pricing Authority the power to set ceiling prices on the National List of Essential medicines. [17]

Sri Lanka

In Sri Lanka, the Consumer Affairs Authority has the power to set the Maximum Retail Price (MRP) for goods specified by the government as essential commodities. [18] In 2021 the Sri Lankan government enacted price controls on several essential items resulting in shortages. [19] [20]

Price floor

Protesters call for an increased legal minimum wage as part of the "Fight for $15" effort to require a $15 per hour minimum wage in 2015. A government-set minimum wage is a price floor on the price of labour. Fight for $15 on 4-15 (17161520871).jpg
Protesters call for an increased legal minimum wage as part of the "Fight for $15" effort to require a $15 per hour minimum wage in 2015. A government-set minimum wage is a price floor on the price of labour.

A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, [21] good, commodity, or service. A price floor must be higher than the equilibrium price in order to be effective. The equilibrium price, commonly called the "market price", is the price where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change, often described as the point at which quantity demanded and quantity supplied are equal (in a perfectly competitive market). Governments use price floors to keep certain prices from going too low.

Two common price floors are minimum wage laws and supply management in Canadian agriculture. Other price floors include regulated US airfares prior to 1978 and minimum price per-drink laws for alcohol.

World War II poster about US price controls "Cost of Living 1918-1944" - NARA - 514088.jpg
World War II poster about US price controls

Since the credibility revolution starting in the 1990s, minimum wages have often found strong support among economists. [2] [3] [4] [5]

Advantages of a price floor are:

Disadvantages of a price floor are:

Price ceiling

A related government intervention to price floor, which is also a price control, is the price ceiling; it sets the maximum price that can legally be charged for a good or service, with a common example being rent control.

A price ceiling is a price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the event of monopoly ownership of a product, all of which can cause problems if imposed for a long period without controlled rationing, leading to shortages. [22] Further problems can occur if a government sets unrealistic price ceilings, causing business failures, stock crashes, or even economic crises. In fully unregulated market economies, price ceilings do not exist.

While price ceilings are often imposed by governments, there are also price ceilings that are implemented by non-governmental organizations such as companies, such as the practice of resale price maintenance. With resale price maintenance, a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or below a price ceiling (maximum resale price maintenance) or at or above a price floor.

Criticism

The primary criticism leveled against the price ceiling type of price controls is that by keeping prices artificially low, demand is increased to the point where supply cannot keep up, leading to shortages in the price-controlled product. [23] For example, Lactantius wrote that Diocletian "by various taxes, he had made all things exceedingly expensive, attempted by a law to limit their prices. Then much blood [of merchants] was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever. Until, in the end, the [price limit] law, after having proved destructive to many people, was from mere necessity abolished." [24]

As with Diocletian's Edict on Maximum Prices, shortages lead to black markets where prices for the same good exceed those of an uncontrolled market. [23] Furthermore, once controls are removed, prices will immediately increase, which can temporarily shock the economic system. [23] Black markets flourish in most countries during wartime. States that are engaged in total war or other large-scale, extended wars often impose restrictions on home use of critical resources that are needed for the war effort, such as food, gasoline, rubber, metal, etc., typically through rationing. In most cases, a black market develops to supply rationed goods at exorbitant prices. The rationing and price controls enforced in many countries during World War II encouraged widespread black market activity. [25] One source of black-market meat under wartime rationing was by farmers declaring fewer domestic animal births to the Ministry of Food than actually happened. Another in Britain was supplies from the US, intended only for use in US army bases on British land, but leaked into the local native British black market.

A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973, and March 17, 1974. Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel at the low price set by the U.S. Cost of Living Council. The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared. It made no difference whether prices were voluntarily or involuntarily posted below the market clearing price. Scarcity resulted in either case. Price controls fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but such controls do manage to reduce supply. [26] [27]

Nobel Memorial Prize winner Milton Friedman said, "We economists don't know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound. Instantly you'll have a tomato shortage. It's the same with oil or gas." [28]

U.S. President Richard Nixon's Secretary of the Treasury, George Shultz, enacting Nixon's "New Economic Policy", lifted price controls that had begun in 1971 (part of the Nixon Shock). This lifting of price controls resulted in a rapid increase in prices. Price freezes were re-established five months later. [29] Stagflation was eventually ended in the United States when the Federal Reserve under chairman Paul Volcker raised interest rates to unusually high levels. This successfully ended high inflation but caused a recession that ended in the early 1980s.

See also

Related Research Articles

A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Because minimum wages increase the cost of labor, companies often try to avoid minimum wage laws by using gig workers, by moving labor to locations with lower or nonexistent minimum wages, or by automating job functions. Minimum wage policies can vary significantly between countries or even within a country, with different regions, sectors, or age groups having their own minimum wage rates. These variations are often influenced by factors such as the cost of living, regional economic conditions, and industry-specific factors.

In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.

<span class="mw-page-title-main">Inflation</span> Devaluation of currency over a period of time

In economics, inflation is a general increase in the prices of goods and services in an economy. This is usually measured using the consumer price index (CPI). When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of CPI inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose.

<span class="mw-page-title-main">Office of Price Administration</span> Former US federal government agency

The Office of Price Administration (OPA) was established within the Office for Emergency Management of the United States government by Executive Order 8875 on August 28, 1941. The functions of the OPA were originally to control money and rents after the outbreak of World War II.

<span class="mw-page-title-main">Rationing</span> Controlled distribution of scarce resources, goods, or services

Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resources being distributed on a particular day or at a particular time. There are many forms of rationing, although rationing by price is most prevalent.

<i>Economics in One Lesson</i> Book by Henry Hazlitt

Economics in One Lesson is an introduction to economics written by Henry Hazlitt and first published in 1946. It is based on Frédéric Bastiat's essay Ce qu'on voit et ce qu'on ne voit pas.

Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually seeking to establish wages and prices below free market level.

Labour power is the capacity to do work, a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, i.e. labour power, and the physical act of working, i.e. labour. Labour power exists in any kind of society, but on what terms it is traded or combined with means of production to produce goods and services has historically varied greatly.

<span class="mw-page-title-main">Price ceiling</span> Method of price control

A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation, in the event of an investment bubble, or in the event of monopoly ownership of a product, all of which can cause problems if imposed for a long period without controlled rationing, leading to shortages. Further problems can occur if a government sets unrealistic price ceilings, causing business failures, stock crashes, or even economic crises. On the other hand, price ceilings give a government to the power to prevent corporations from price gouging or otherwise setting prices that create negative outcomes for the government's society.

<span class="mw-page-title-main">Price floor</span> Government- or group-imposed price control

A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product, good, commodity, or service. It is one type of price support; other types include supply regulation and guarantee government purchase price. A price floor must be higher than the equilibrium price in order to be effective. The equilibrium price, commonly called the "market price", is the price where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change, often described as the point at which quantity demanded and quantity supplied are equal. Governments use price floors to keep certain prices from going too low.

The Balcerowicz Plan, also termed "Shock Therapy", was a method for rapidly transitioning from an economy based on state ownership and central planning, to a capitalist market economy. A group of experts, which they formed together with Balcerowicz, including Stanisław Gomułka, Stefan Kawalec and Wojciech Misiąg, in September 1989 created a reform plan based on an earlier idea of Jeffrey Sachs, and on October 6, an outline of this plan was presented to the public by Balcerowicz at a press conference broadcast by TVP.

<span class="mw-page-title-main">Shortage</span> Economic demand that exceeds supply

In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply (surplus).

A buffer stock scheme is an attempt to use commodity storage for the purposes of stabilising prices in an entire economy or an individual (commodity) market. Specifically, commodities are bought when a surplus exists in the economy, stored, and are then sold from these stores when economic shortages in the economy occur.

The Law of the General Maximum was instituted during the French Revolution on 29 September 1793, setting price limits and punishing price gouging to attempt to ensure the continued supply of food to the French capital. It was enacted as an extension of the Law of Suspects of 17 September, and succeeded the Law of the Maximum of 4 May 1793, which served a similar purpose.

<span class="mw-page-title-main">Vuskovic plan</span>

The Vuskovic Plan was the basis for the economic policy of the Popular Unity (UP) government of Chilean President Salvador Allende. It was drafted by and named after his first Economics Minister Pedro Vuskovic, who had worked before with the CEPAL. Although good results were obtained in 1970, hyperinflation made a comeback in 1972. By 1973, Chile was in shambles – inflation was hundreds of percents, the country had no foreign reserves, and GDP was falling.

Disequilibrium macroeconomics is a tradition of research centered on the role of disequilibrium in economics. This approach is also known as non-Walrasian theory, equilibrium with rationing, the non-market clearing approach, and non-tâtonnement theory. Early work in the area was done by Don Patinkin, Robert W. Clower, and Axel Leijonhufvud. Their work was formalized into general disequilibrium models, which were very influential in the 1970s. American economists had mostly abandoned these models by the late 1970s, but French economists continued work in the tradition and developed fixprice models.

<span class="mw-page-title-main">1980s austerity policy in Romania</span> Unpopular economic policy in Communist Romania which led to the 1989 Romanian Revolution

In the 1980s, severe austerity measures were imposed in the Socialist Republic of Romania by President Nicolae Ceaușescu in order to pay out the external debt incurred by the state in the 1970s. Beginning in 1981, the austerity led to economic stagnation that continued all throughout the 1980s, a "sui generis shock therapy" which lowered the competitiveness of the Romanian economy and decreased the amount of exports.

<span class="mw-page-title-main">Economic policy of the Nicolás Maduro administration</span>

When elected in 2013, Nicolás Maduro continued the majority of existing economic policies of his predecessor Hugo Chávez. When entering the presidency, President Maduro's Venezuela faced a high inflation rate and large shortages of goods that was left over from the previous policies of President Chávez. These economic difficulties that Venezuela was facing were one of the main reasons of the current protests in Venezuela. President Maduro has blamed capitalism for speculation that is driving high rates of inflation and creating widespread shortages of staples, and often said he was fighting an "economic war", calling newly enacted economic measures "economic offensives" against political opponents he and loyalists state are behind an international economic conspiracy. However, President Maduro has been criticized for only concentrating on public opinion instead of tending to the practical issues economists have warned the Venezuelan government about or creating any ideas to improve the economic situation in Venezuela such as the "economic war".

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

The National Superintendence for the Defense of Socioeconomic Rights, abbreviated as SUNDDE, is a Venezuelan governmental organization. Established in 2014, the organization is tasked with the management of price controls and enforcing business compliance with government regulations.

References

  1. 1 2 Rockoff, Hugh (2008). "Price Controls". In David R. Henderson (ed.). The Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN   978-0865976658. OCLC   237794267.
  2. 1 2 Card, David; Krueger, Alan B. (1995). "Time-Series Minimum-Wage Studies: A Meta-analysis". The American Economic Review. 85 (2): 238–243. ISSN   0002-8282. JSTOR   2117925.
  3. 1 2 Chletsos, Michael; Giotis, Georgios P. (2015-01-14). "The employment effect of minimum wage using 77 international studies since 1992: A meta-analysis". mpra.ub.uni-muenchen.de. Retrieved 2023-06-01.
  4. 1 2 Wolfson, Paul J.; Belman, Dale (2015). "15 Years of Research on U.S. Employment and the Minimum Wage". SSRN Electronic Journal. doi:10.2139/ssrn.2705499. ISSN   1556-5068.
  5. 1 2 Dube, Arindrajit (2019). Impacts of minimum wages: review of the international evidence. London: The National Archives. pp. 22–52. ISBN   9781912809899.
  6. ↑ Banarsi Prasad Saksena (1992) [1970]. "The Khaljis: Alauddin Khalji". In Mohammad Habib and Khaliq Ahmad Nizami (ed.). A Comprehensive History of India: The Delhi Sultanat (A.D. 1206–1526). Vol. 5 (Second ed.). The Indian History Congress / People's Publishing House. p. 429. OCLC   31870180.
  7. ↑ "File: "Prices charged in this store will not exceed those indicated in the most recent list of Fair Prices applicable to this – NARA – 512556.jpg – Wikimedia Commons" . Retrieved 2012-01-21.
  8. ↑ "File: "Closed. Public Notice. For Violation of the rules of the United States Food Administration This Place is Closed days... – NARA – 512564.tif – Wikimedia Commons" . Retrieved 2012-01-21.
  9. ↑ "File: "This Store sells at FAIR PRICES as interpreted by U.S. Food Administration...", ca. 1917 – ca. 1919 – NARA – 512714.tif – Wikimedia Commons" . Retrieved 2012-01-21.
  10. ↑ "File: "We violated the regulations of the Food Administration but have pledged Full Obedience in the Future.", ca. 1917 – ca. – NARA – 512528.jpg – Wikimedia Commons" . Retrieved 2012-01-21.
  11. ↑ Paths to Democracy: Revolution and Totalitarianism By Rosemary H. T. O'Kane page 135
  12. ↑ "File: "Cost of Living 1918–1944" – NARA – 514088.jpg – Wikimedia Commons" . Retrieved 2012-01-21.
  13. ↑ Ruddy, Daniel (2016-08-29). Theodore the Great: Conservative Crusader. Simon and Schuster. ISBN   978-1-62157-441-5. OCLC   966553031.
  14. ↑ Amalgamated Meat Cutters v. Connally , 337F. Supp.737 (D.D.C.1971). "Archived copy". Archived from the original on 2023-09-04. Retrieved 2023-09-04.{{cite web}}: CS1 maint: archived copy as title (link) CS1 maint: bot: original URL status unknown (link)
  15. ↑ the well of natal
  16. ↑ Girish Gupta (16 April 2015). "Price controls and scarcity force Venezuelans to turn to the black market for milk and toilet paper". The Guardian.
  17. ↑ "Indian government releases DPCO 2013, expanding price controls to 652 drugs". ihsmarkit.com. Retrieved 2020-04-12.
  18. ↑ "Pricing and Management Division". www.caa.gov.lk. Retrieved 2023-07-08.
  19. ↑ "Sri Lanka declares food emergency as forex crisis worsens". Al Jazeera. Retrieved 2022-02-17.
  20. ↑ "Sri Lanka allows sharp rise in food prices to ease shortages". Al Jazeera. Retrieved 2022-02-17.
  21. ↑ "Price floor – Definitions from Dictionary.com". dictionary.reference.com. Retrieved 2008-05-02.
  22. ↑ Gregory, Mankiw, N. (2016-12-05). Principles of macroeconomics (Eighth ed.). Australia. ISBN   978-1305971509. OCLC   953710348.{{cite book}}: CS1 maint: location missing publisher (link) CS1 maint: multiple names: authors list (link)
  23. 1 2 3 Walter J. Wessels, Economics (2000), pp. 232–33.
  24. ↑ Lactantius. "CHAP. VII.". On the Deaths of the Persecutors (Christian Classics Ethereal Library ed.). Calvin College.{{cite book}}: |work= ignored (help)
  25. ↑ The Home Front (facsimile ed.). London: Imperial War Museum. July 1945. ISBN   978-1904897118.
  26. ↑ Taylor and Van Doren, pp. 26–28
  27. ↑ Thomas Sowell, Applied Economics: Thinking Beyond Stage One (2008), pp. 7–9, 112–113, ISBN   0465003451
  28. ↑ "Controls blamed for U.S. energy woes", Los Angeles Times, February 13, 1977, Milton Friedman press conference in Los Angeles.
  29. ↑ "George P. Shultz (1972–1974)". Treasury.gov. 2010-11-20. Retrieved 2013-09-27.

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