Free Sample Descriptive Essay: Price Control

Essay Economics
Oct 29, 2007

Over the history of the United States, the topic of price controls, including the use of price caps, price floors, and government intervention for perceived or actual price gouging, has come up quite often. Times of national crises such as terrorist attacks, natural disasters, and economic calamities will bring the topic of price controls to the forefront quite quickly.  While there is a time and a place for governmental intervention, if the intervention is not significant enough or is too heavy-handed, the consequences of government interference can be quite substantial. The specter of public outrage and outcries can cause an action that is too swift or not just.

Consequences of Price Control

The subject of price controls had been omnipresent in American and international media markets for a rather long time. Politicians and other public figures such as political pundits often frame their arguments under the rubric that the less affluent members of society need governmental assistance to prevent skyrocketing prices from ruining their quality of life. They assert that the controls are necessary to maintain a level playing field. However, there are usually significant consequences when governmental price controls are used. Those consequences will be discussed throughout the paper.

Price Caps

Price control limits a product’s or service’s price to mitigate economic and market issues. This limitation can come in the form of price caps or price ceilings which set a maximum price for certain products. The parties that dictate price caps, such as the government or the market itself, do so to maintain the affordability of vital and non-optional goods. Price caps allow consumers access to non-optional goods that would otherwise be too expensive without price control (Kenton, 2022). This mainly helps consumers who receive median to low income. For instance, an individual earning six figures will have no problem paying an extra two dollars for gas. However, an individual earning minimum wage and feeding a family of four may struggle to set aside gas money due to other expenses.

While price caps are beneficial to consumers, some disadvantages can occur as the limitation persists in the market. Price caps can result in shortages, deterioration of product quality, and rationing (Kenton, 2022). These issues can occur because manufacturers tend to suffer from price caps. Manufacturers or suppliers must follow a maximum price, meaning that regardless of their expenses, they cannot increase a product’s price. This can lower their profit margin and, in some cases, lead to no profit. To mitigate the issue, they may start using inferior materials for production, leading to poor product quality. For instance, governments may place price caps on medicine during a pandemic to prevent drug companies from selling at a high price and taking advantage of high demand. If the price cap is too low and drug companies are not earning from their products, they may start using inferior materials for their packaging to compensate for the price control.

Alternatively, products’ low prices can lead to shortages and rationing as consumers purchase more than they need. Since price caps lead to lower earnings for companies, they may not have enough money to produce products and meet the market's high demand (Casselman & Smialek, 2022). These situations seem inevitable since price caps disrupt supply and demand, leading to economic problems. Using the previous example, a drug company may not be earning enough to produce a steady supply of medicine. If the price cap persists, the company will continue to struggle with production and would eventually have to ration product supply because of the shortage. In some cases, a manufacturer may even exit the market, further reducing supply. So while price caps allow consumers access to goods, they are detrimental to manufacturers and the market in the long term.

Price Floors

Price flooring is another form of price control that authorities can mandate in a market. Setting a price floor is setting a minimum price for a product. Manufacturers cannot sell a product below that threshold. Unlike price caps, price floors tend to benefit manufacturers and producers since authorities establish a minimum price for products during times with an unfair market (Kenton, 2022). Price flooring is often present in the farming industry since it benefits farmers. Price flooring prevents farmers from having to take a loss on their crops, which are necessary for the market and country at large. Through price flooring, governments can help farmers and other producers continue operations regardless of economic problems. 

While price flooring is beneficial for farmers, its effect on supply can be detrimental to the market. Price flooring can lead to surpluses when the minimum price is too high that it decreases the demand (Price Ceilings and Price Floors, n.d.). As mentioned earlier, price floors prevent farmers from taking a loss, especially during times with extreme weather conditions. However, if supply is not in unison with demand, these price floors can fail unless the government provides subsidies to offset what the farmers do not get from their crops. The reason for this is that if there is a low demand for a good that has been produced to excess, the desired price per unit will not be attained because the market demand will not be significant enough to justify such a price. Subsidies are a way to offset losses that would invariably occur if the market was left to its own devices.

Price Gouging

While governments are generally playing with fire when they deal with price controls, there are many examples where keeping tabs on price is necessary. A good example is price gouging on vital goods during times of crisis. Price gouging is when producers or companies set extremely high prices to take advantage of high demand (Morton, 2022). This often happens to the price of gasoline after hurricanes and other disasters. A more specific example was the 9/11 terrorist attacks. There were gas stations raising their “per gallon” price far above the market equilibrium price. Many gas stations capitalized on fear and ambiguity by artificially expanding the price point.

The state of New York took action against several stations that were allegedly inflating their price. In two separate cases, gas station owners deflected blame and tried to say the prices quoted to them by suppliers dictated their prices. In one case, a supplier quoted a price, the gas station owner raised his price to match, and the delivery never occurred. The gas station owner did not lower his price to reflect this and Elliott Spitzer, then the New York Attorney General, decided that this inaction was criminal. In another incident in the same state, a gas station owner feigned ignorance and indicated that he was charged a per-gallon price lower than what he believed he would be charged. In both cases, Mr. Spitzer took action and fined the gas stations (Gregory, 2005).

Another example of greed affecting a market is the Enron debacle with the California electricity market. For a time, California became the laughingstock of the country because of its apparent ineptitude. It was deemed that they had a superior infrastructure to meet the energy demands of the public in California but that the demand was going unmet. There was a reason for this, though, and it had more to do with private enterprise than it did with government bureaucracy. Commodity traders involved with Enron were intentionally withholding supplies of electricity from the market. Enron traders were taking quantities of power out of California and then selling it back to California (“Damaging Enron memos,” 2002). This was done to artificially raise the price. In a normal supply and demand situation, a lesser supply with the same or higher demand means a higher price. It is not unlike gasoline in this regard.

Proper Use of Price Controls

In the end, price controls do have a time and a place. Authorities should use them sparingly and should not implement them when they are uncertain of why prices are spiking up or down. If the reason is unfettered human greed, then action may be necessary. However, if the price is spiking because of high demand or low supply , price controls are rarely a good idea. If possible, authorities should address the root causes of the supply and demand issues directly.

Additionally, authorities should address the abundance of supply and not the price itself.  According to The Federal Trade Commission (2003), price controls tend to fail in helping consumers within a competitive market and can often lead to more harm (cited in Lofstock, 2003). Furthermore, the author of the text stated clearly in their fourth chapter that interfering with the price will impact supply, demand, or both. Doing this carelessly can cause unforeseen consequences including shortages or gluts (Colander, 2005).

Conclusion

As for what will likely happen, it depends on who is in power. There are a few exceptions, but the line of reasoning that is followed often depends on which political party is in power. Democrats are much more willing to use price controls than Republicans. Republicans tend to be more disposed to let the market correct itself. Because of the offsetting nature of these two views and the rather equal distribution of power that exists right now, the actual events that will likely pan out are probably somewhere in the middle. Price controls will usually fail wherever they are used and the issue will be used as a political football during which consumers and/or businesses will be pawns on the political chessboard. Manipulating the market without being wise about it is not a good idea for the government or private industry.

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References

Caselman, B. & Smialek, J. (2022). Price Controls Set Off Heated Debate as History Gets a Second Look. The New York Times. Available at https://www.nytimes.com/2022/01/13/business/economy/inflation-price-controls.html#:~:text=In%20that%20model%2C%20when%20the,That's%20the%20theory. Accessed: October 17, 2022.

Colander, D. (2005). Microeconomics. (6th ed.). New York, NY: McGraw-Hill.

Damaging Enron Memos. (2002). Energy User News, 27(6), 27.

Gregory, T. (2005). How a North Country Gas Station Got into Price-Gouging Trouble. Business Journal (Central New York), 19(52), 1-22.

Kenton, W. (2022). Price Controls Explained: Types, Examples, Pros & Cons. Investopedia. Available at https://www.investopedia.com/terms/p/price-controls.asp. Accessed: October 17, 2022.

Lofstock, J. (2003). FTC Opposes Price Caps. Convenience Store News, 39(3), 12.

Morton, H. (2022). Price Gouging State Statutes. National Conference of State Legislatures. Available at https://www.ncsl.org/research/financial-services-and-commerce/price-gouging-state-statutes.aspx#:~:text=Price%20gouging%20refers%20to%20when,or%20other%20state%20of%20emergency . Accessed: October 17, 2022.

Price Ceilings and Price Floors. (n.d.). Khan Academy. Available at https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/deadweight-loss-tutorial/a/price-ceilings-and-price-floors-cnx. Accessed: October 17, 2022.

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