Question
Discuss the view that attempts to help poor consumers through the imposition of control prices will always fail.
Answer
The government may set maximum (low) prices to prevent them from rising above a certain level. Maximum price can be defined as a price ceiling set by the government or some other agency. The price is not allowed to rise above this level. For example, in times of famine the government may set maximum prices for basic goods so that poor people can afford them. A key benefit of price ceilings is that they help prevent suppliers from engaging in price gouging (spiking the price of goods, services or commodities to a level much higher than is considered fair). They are also beneficial for keeping the cost of living affordable during periods of high inflation when prices increase faster than income.
However, without controlled rationing, the resulting shortages can create further problems. Firms can decide which customers should be allowed to buy: for example, giving preference to regular customers. Another major problem is likely to be the emergence of underground markets, where customers, unable to buy enough in the legal markets, may well be prepared to pay very high prices.
Furthermore, maximum pricing can paradoxically lead to higher prices, as this price control can lead to collusion among suppliers who would otherwise compete on price. Forming a cartel enables competing suppliers to act like a monopoly, limiting quantities and raising prices. In many developing countries, governments control the price of basic foodstuffs in order to help the urban poor. The effect, however, is to reduce farmers’ incomes, who are then encouraged to flock into towns and cities.
To minimise these problems, the government may attempt to reduce the shortage by encouraging supply; giving subsides or tax reliefs to firms or direct government production. Regulators can also enforce a maximum price level, making it easier to monitor pricing.
References
Sloman, J., Wride, A., and Garratt, D. (2012) Economics. 8th edn. Essex: Pearson Education
