ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

PRICE CONTROLS IN FREE MARKETS AND REASONS FOR SUCH CONTROLS

Updated on March 3, 2011

Free markets allow prices to be determined purely by the forces of supply and demand. Prices can be influenced by either changes in demand or supply or both. If the government wishes to influence the prices at which some product is bought or sold, it has two main alternatives. First, it could change the equilibrium price by altering the commodities demand and supply. Second it may change the price by enacting a law that regulates the price. Price control refers to the latter which is influencing price by law rather than market forces. The reason for price control may be any of the following.

Reasons for Price Controls

1. Price controls may be imposed to protect the interest of consumers, especially when prices of goods and services are extremely high, probably due to a reduction in output level, as a result of bad weather or natural disasters such as bush fires, floods earthquakes, or wartime shortages. In such cases consumers within the low income bracket cannot afford commodities. Governments come in here to ration the commodity among members of the society, by legislating maximum prices.

2. They may also be imposed with the view to protecting producers against fall in their incomes in order to ensure continuity in production. For instance a fall in farmers’ income due to an increase in output of agricultural products would most likely discourage production. To avoid such an occurrence, minimum prices are fixed, the aim of which is to guard against a fall in the farmers’ income and to encourage productivity.

3. Price controls may also be imposed to check inflation. Inflation occurs when there is a sustained upward trend in the general price level. During inflation periods those workers on fixed income suffer the most. Due to rise in the cost of living, savings level also falls. Price control is therefore one of the measures taken to solve inflation.

4. Labor may be paid a wage far less than the cost of living. Price controls allow the government to determine minimum wages that should be paid to workers. This is necessary because it will help the government to protect the interest of workers offering their services to exploitative employers.

5. It is possible that the free market forces of demand and supply may fail to distribute resources in the interest of the economy. Price controls may be used to distribute resources to the optimum in a society. For example market forces of demand and supply may direct labor to the distribution trade, as against acquisition of skills which is necessary for an efficient labor force. Government could redirect resources by offering higher wages to skilled labor.

There are two types of price control namely maximum price, also called price ceilings and minimum price (price floors). Maximum price is a price established by government beyond which it is illegal to sell. For all practical purposes, maximum prices are fixed below the equilibrium price. When fixed below the equilibrium price quantity demanded increases, because price has been reduced from a higher equilibrium. Suppliers however reduce the quantity they offer for sale thereby creating a shortage or excess demand oversupply.

Minimum price or price floors by definition is the price below which it is illegal for a commodity to be bought or sold. In most countries today, there are minimum wage laws specifying “floors” for the wages to be paid to different kinds of labor. Resale price maintenance, which exists in many countries, also gives the manufacturer power to prevent the retailer from selling below the prices that are set by the manufacturer. If the purpose of the minimum price is to protect the interest of the producer by increasing and stabilizing his income thereby encouraging the producer to produce more, then minimum prices must always be fixed above the equilibrium price. The equilibrium price is the price at which demand equals supply and has no tendency to change unless there is a change in either demand or supply or both.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)