Government’s Interventions in Price Control Price controls are the government’s attempts to fix prices for commodities and services so that the prices of certain products would not go too high or too low. This would prevent all sorts of problems concerned with monopolies and price cartels. Maximum prices are set with the intention of preventing inflation, whereas, the minimum prices or the price floors are set in order to prevent Deflation. Price floors would also prevent many fraudulent activities that are concerned with transactions conducted on very low or high costs. It has long been argued if the government should or should not intervene in the setting of prices of domestic and non-domestic products. Meanwhile, the concepts of pure capitalization believe that the prices should not be regulated and/or set by the government and should rather be left for the buyers and sellers to decide. Considering the competition, the capitalist economists argue that the prices would themselves regulate at a low and manageable price. What the capitalists failed to consider was the concept of Cartels and the fact that if the prices are not set, the seller getting the lowest cost would be the only one to survive among many market players. As only those players who have a specialization and are getting lower and competitive rates from their own suppliers would be able to sell their products at a lower price and therefore, they would be the only ones to continue to exist. However, cartels and monopolies can pose a very harmful threat to the market by introducing the price of their choice. On the other hand if we consider the aspect where the government does set prices and costs, there is then, no reason to compete in the market. Even if an organization improves its products and services, does the best marketing possible and provides aftersales service, it can still not raise its prices, therefore, eliminating the need to be competitive in the market. The market always tries to attain equilibrium price level in which both, the quantity demanded and the quantity supplied, are balanced. This does not satisfy the buyer and the seller, because the buyer wants to pay less than what is trending. Meanwhile, the seller would always try to get the best for the product/service. Thus, there is an increased requirement for the government to interfere and set the price ceilings and price floors.
1
Price Ceiling, here, is set by the government as the maximum price. The seller cannot charge higher than the price ceiling for the particular product. Whereas, the price floor, similarly, is the minimum allowed price set by the government, below which price the sellers cannot sell that product. Some economists also believe that the price ceilings and floors should not be implemented. For example, if a product is supplied at the market ceiling, the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss. Secondly, in case of the price ceiling, the concept of the black market emerges, where the buyers agree to purchase the product at a higher price. This situation can be corrected in a number of ways. The government can provide subsidies to encourage the production of such goods. However, if this happens, the government would have to divert their funds from other sources and other activities. The government can also produce these products themselves or release previously stored inventory of such goods to ensure that there is no shortage in the market. However, this will not be possible for many products, including all perishable items. Similarly, if the products are being sold on a price floor, the demand might decrease which will create excess surplus. The government can then purchase the surplus at a minimum price. However, this option has consequences. Buying the surplus and storing it will cost for warehousing, whereas if the excessive product is sold abroad, it will be considered as dumping.
Reference: http://www.researchomatic.com/government-interventions-in-price-control-153807.html
2