Price Controls are always mandated by Government edict.
It is only the coercive power of a government that can enforce price controls.
In the absence of some form of coercion, a free market will heed the incentives and restore the price back to the Equilibrium Price
There are lots of politically attractive reasons for enacting Price Controls –
- claims of “price gouging” by suppliers.
- making some commodity “affordable” to the less well off.
But the unintended consequence of such action are all the result of the ensuing shortages
- At the controlled price (Pc), only Qs is offered for sale, any more and the controlled price will be less than the costs of production
- Since at Pc, the demand is Qd, there is a shortage of (Qd-Qs).
The normal market responses to a shortage is increasing price, which makes a large opportunity profit, which attracts new investment in production; which increases the quantity supplied, which reduces the prices.
In the enforced absence of normal market responses, the existence of shortages results in
- Illegal Black-Market sales at the higher price,
- a Declining Quality of the commodity offered for sale as Producers attempt to reduce their costs.
The quality of the product offered for sale declines over time because
- there is always another customer clamoring for the product
- so there is no need to invest in maintenance and repair, quality control, or quality manufacture.
Prices are what we pay for costs – and if they do not pay enough to cover the costs, then centuries of history, in countries around the world, show that the supply is going to decline in quality and quantity.
