Price Control Makes Me Sad
Updated: Nov 24, 2019
This is a basic intro to and my argument against price control.
In an ideal world, this is where it stays. The price fluctuates only to supply and demand shifters. That's how it always is, right? Of course not. Why make things so easy?
If you have not heard of the terms before, allow me to introduce them to you: Price controls, or price ceilings and price floors.
An effective price ceiling is a government regulation setting a price suppliers cannot go above. An example of this would be rent control. The equilibrium price would be $600, but the government puts a price ceiling thereof $500.
This makes the supplier lose incentive, creating a shortage of apartments for rent.
You may ask, "why would they do that?" They do this to try and make sure that suppliers aren't taking advantage of individuals, but the unintended consequences from the price ceiling put people at another disadvantage. The person that couldn't afford $600 a month now just doesn't have a room available at all.
Price floors are the opposite. They put a price control above the equilibrium.
An example of this would be minimum wage. The equilibrium may be $10 an hour, but the price floor says the company must pay workers $12 an hour. This creates a surplus of workers. More workers are willing to work for this pay, but the company can either not afford it, or is not willing to accommodate the new price floor. The extra workers will not be hired, and the company will be forced to hire overqualified people for roles that do not require they be that qualified.
Both methods are to protect the public, but oh those unintended consequences.
Price control makes the most sense for highly inelastic products. What is that?? Elasticity is the responsiveness to price changes in products. This is what keeps suppliers from going wild and making avocados $50.
With highly elastic products, consumers will be very responsive to price change. These highly elastic products are things with many substitutes. For example, candy. Your favorite candy just went from $1.50 to $6. You can easily find a replacement. The company selling the $6 candy will lose way too much money to continue, so they will lower the price. It does not make sense to put a price control on this because the market regulates itself.
Inelastic products and services are something with very few replacements, insulin, for example. This is where price ceilings come in. (Patents are a huge culprit in the crazy prices of life saving drugs, but that's another post.) Since insulin has almost no substitutes, it's easy for the producers to make prices much higher as they have no competition. The government sets a price ceiling on that. They can't make it too low or the producers will lose all incentives and there will be a huge shortage on this widely scarce product.
I would also like to note nothing is perfectly elastic or inelastic, it looks more like this:
The problem is relatively inelastic products aren't the only things getting price controls put on them, and it makes the market go wacky. In conclusion, I'm not the biggest fan of price controls. It's a fine balance and I don't have the answer, but I definitely don't think it's price controls.