Sports franchises often impose price controls through a method called dynamic pricing. For example, tickets for a New York Yankees baseball game are subject to variable prices that may differ from other games. According to Major League Baseball, these prices are based on changing factors that affect market demand. Another difficulty may arise if there is a monotonous tendency in the population. As mentioned earlier, price controls are a form of economic intervention mandated by the government. They are designed to make things more affordable for consumers and are also commonly used to steer the economy in a certain direction. For example, such restrictions may be deemed necessary to curb inflation. Price controls contrast with prices, which are set by market forces determined by producers based on supply and demand. While these alternative measures are often better than price controls, they are not perfect. Rents and wage subsidies cost the state money and therefore require higher taxes. As we will see in the next section, taxation has its own costs.
While the reasons for price controls may be affordability and economic stability, they can have the opposite effect. It is well known that, in the long run, price controls lead to problems such as shortages, rationing, deterioration of product quality and illegal markets that arise to deliver price-controlled goods through unofficial channels. Producers can suffer losses, especially if prices are set too low. This can often lead to a decline in the quality of goods and services available. Price controls can be set up with the best of intentions, but it often doesn`t work. Most attempts at price controls often struggle to overcome the economic forces of supply and demand for long periods of time. When prices are set by trading in an open market, prices change to maintain the balance between supply and demand. Government-imposed price controls can result in excess demand at price ceilings or oversupply at floor prices. Another of the ten principles of economics is that governments can sometimes improve market performance. In fact, policymakers are forced to control prices because they consider the market outcome to be unfair.
Price controls are often aimed at helping the poor. For example, rent control laws aim to make housing affordable for all, and minimum wage laws aim to help people escape poverty. Governments often impose controls on drug prices. This is especially true for life-saving drugs and specialty medications such as insulin. Pharmaceutical companies are often under pressure because they set prices that are too high. Their goal is usually patent protection and to cover the high costs of research and development (R&D) and distribution. Consumers and governments say this makes some drugs out of reach for the average person. The term “price controls” refers to the legal minimum or maximum prices set for certain goods. Price controls are usually imposed by the government on the open market. They are generally introduced as a means of direct economic intervention to manage the affordability of certain goods and services, such as rent, gasoline and food. While price controls can make some goods and services more affordable, they can often lead to market disruptions, losses for producers, and a noticeable change in quality. Some of the most common examples of price controls include rent control (where governments set a maximum amount of rent a landlord can charge and the limit by which rent can be increased each year), drug prices (to make drugs and health care more affordable), and minimum wages (the lowest possible wage a company can pay its employees).
Critics say price controls often lead to an imbalance between supply and demand. This, in turn, can lead to bottlenecks and underground markets. If housing prices are too low, there may not be enough supply, which increases demand. For example, homeowners may see the condition of their properties deteriorated because they do not earn enough to maintain them. Unlike the free market, where prices are dictated by supply and demand, price controls set the minimum and maximum prices of goods and services. Governments and price control advocates say this policy is necessary to make things more accessible to consumers and suppliers. By introducing price controls, consumers can afford vital goods and services and producers can remain profitable. However, critics often say the opposite effect, leading to an imbalance in the market between supply and demand and illegal markets. Governments can also set price limits for goods and services if they believe producers are not benefiting from the way goods and services are valued in the open market. This is how companies remain competitive and ensure they are profitable. But price controls often hurt those they are trying to help. Rent control can keep rents low, but it also discourages landlords from maintaining their buildings and makes it difficult to find housing.
Minimum wage laws may increase the income of some workers, but they also result in unemployment of others. One of the ten principles of economics discussed in Chapter 1 is that markets are generally a good way to organize economic activities. This principle explains why economists generally reject price ceilings and floor prices. For economists, prices are not the result of an arbitrary process. Prices are the result of millions of business and consumer decisions that lag behind supply and demand curves. The crucial task of prices is to balance supply and demand and thus to coordinate economic activity. When policymakers set prices by legislative decree, they obscure the signals that normally guide the allocation of society`s resources. Price controls take two forms: price floors and price ceilings. Floor prices are the minimum prices of goods and services. They may be set by the government or, in some cases, by the producers themselves. Minimum prices are introduced to help producers when the authorities consider that prices are too low, leading to an unfair market. Once fixed, prices cannot fall below the minimum.
Price controls are often introduced for basic consumer goods. These are essential goods such as food or energy products. For example, prices for things like rent and gas have been capped in the United States. Controls set by the Government may set minimum or maximum levels. Price caps are called price caps, while minimum prices are called floor prices. Price caps are the highest points at which goods and services can be sold. This happens when authorities want to help consumers when they think prices are far too high. This applies in particular to the rent brake, when government agencies want to protect tenants from slum lords and overzealous landlords. Just like floor prices, prices cannot go beyond the ceilings once they are set.
Helping those in need can be achieved by means other than price controls. For example, the government can make housing more affordable by paying a fraction of the rent to poor families. Unlike the rent brake, these rent subsidies do not reduce the supply of housing and therefore do not lead to a housing shortage. Similarly, wage subsidies raise the living standards of the working poor without preventing companies from hiring them. An example of a wage subsidy is the Income Tax Credit, a government program that supplements the incomes of low-income workers. Price controls discourage companies from developing monopolies. Companies have an advantage and can dictate prices when demand is high (and supply is scarce). As such, they might be able to raise prices to increase their profits.
Governments can intervene and set price caps to prevent suppliers from further raising prices, allow competitors to enter the market, and break up monopolies that exploit consumers.