Price controls

Price controls are governmental restrictions on the prices that can be charged for goods and services in a market. The most common are prohibitions to charge more than X for goods or services (maximum price) or the prohibition on paying less than Y (minimum price). A less common restriction is to impose an exact price for a certain good, making it illegal to charge more or less than the official rate.

Price controls are an example of central planning or authoritarian control of the economy.

Examples

Common examples of price controls include minimum wage laws, fixed exchange rates, centrally mandated interest rates, etc.

History

Price controls have been documented since the Code of Hammurabi in 1754 BC. Roman Emperor Diocletian also issued an Edict on Maximum Prices in 301 AD. The Law of the Maximum passed in France in 1793 AD during the French Revolution is also a well known example.

Criticism

Price controls subvert the market price discovery mechanism and thus impede the free interplay of the forces of supply and demand. Criticisms are generally divided into ethical and utilitarian arguments:

• Utilitarian arguments focus on the effects that price controls have on the economy. By distorting supply and demand maximum prices (if set below the market rate) will cause shortages of the good in question. Minimum prices (if set above the market rate) tend to create a surplus of the good affected. Because Price controls can restrict exchanges which would have happened in a voluntary market, a priori benefiting both parties to the exchange, they destroy value and reduce economic growth.

• Ethical criticism of Price controls focus on the fact that they are an attack on property rights and free markets. They are an imposition of the planners will on those of market participants and restrict voluntary trade. Enforcing price controls also requires a substantial attack on privacy and an increase of surveillance.