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.
Price Control Consequences
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.
The first main price control is price caps. This method is often used on non-optional goods and services such as vehicle gasoline, food, water, utilities, etc. The idea behind price caps is to keep vital goods affordable for all the people that need them. If the price of gas, for example, spikes up a dollar or two, a person who makes six figures at their job will be able to absorb that extra cost whereas someone who makes ten bucks an hour will not. There is a problem with artificially keeping the price low.
There does seem to be a benefit in keeping the price below a certain level. People will be able to buy the good at a seemingly equitable price. However, one of two things, if not both, will tend to happen if price caps are implemented. First, it will limit or even erase any profit that a market player would hope to gain by being in the market in question. Thus, if the company cannot make money selling the product or service, they will be less inclined to engage and/or produce in that market. This will in turn lower supply.
The other side effect is related to the first. If the price of a good or service is kept artificially, the customer demand for a product or service will tend to spike. This will typically result in a shortage. This condition will become exacerbated if providers of the good or service exit the market as supply will be reduced even further.
Another price control that is sometimes used is price floors. A price floor is the mandating that a type of goods will sell for no less than a certain price. This is often present in the farming industry. There is a benefit to price floors because it prevents farmers from having to take a loss on their crops that are necessary for the market and country at large but still suffer from lower demand. If supply is not in unison with demand, though, these price floors are doomed to 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 rather 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.
While governments are generally playing with fire when they deal with price controls, there are many examples where keeping tabs on price is called for. The first example that could be cited is price gouging on vital goods during times of crisis. One of the goods where this comes up a lot is gasoline. Time frames immediately preceding hurricanes are a good example. A more specific example was the 9/11 terrorist attacks. There were gas stations that were raising their “per gallon” price far above what the actual market equilibrium price was at the time. Many gas stations capitalized on the 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 price. 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 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 having an effect on 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 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, but they should be used sparingly and should not be implemented in ignorance of why the price is spiking up or down in the first place. If the reason is unfettered human greed, then action is called for. However, if the price is spiking because of high demand and/or low supply, price controls are almost never a good idea the root causes of the supply and demand issues should be addressed directly if possible.
The dearth or abundance of supply should be the matter that is directly addressed… not the price itself. The Federal Trade Commission themselves has said as much when they said, in 2003, “(a) significant body of research and experience suggests that price controls have a poor record of improving consumer welfare in markets where competition is possible, and may in fact cause more harm than good in the long term” (Lofstock, 2003). Furthermore, the author of the course text states clearly in its 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).
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.
Colander, D. (2005). Microeconomics. (6th ed.). New York, NY: McGraw-Hill.
Damaging Enron memos. (2002, June). Energy User News, 27(6), 27.
Gregory, T. (2005, December 30). How a north country gas station got into price-gouging
trouble. Business Journal (Central New York), 19(52), 1-22.
Lofstock, J. (2003, March 03). FTC opposes price caps. Convenience Store News, 39(3), 12.