Price Controls – People Controls



Price controls are quite troublesome.  If a government controls prices by putting price ceilings or price floors on a good’s price many things can happen- good and bad.  (to clarify: price ceilings: a price can’t go above a certain amount.- price floors: a price can’t go below a certain amount.)

First of all, if a commodity has a price ceiling placed on it that commodity may not be priced accordingly and people may buy it up because of its cheap cost which could cause a shortage of that commodity.  Producers may even decide that it is not worth it to make that commodity anymore since the new price ceiling has the item priced so low that they can’t earn a decent profit or return.

Think of this, you decide that you want to start a handmade and organic knitwear business.  You have to make all of the items by hand and since the yarn is not widely available you need to set the price a bit higher than other factory manufactured, acrylic knit items in order to cover the time and money you put into the item.

All of the sudden the government comes along and sets a price control on knitwear.  This price ceiling is $10.00 below what you have priced your item at.  Right after the prices have been lowered you receive an abundance of new orders for your knitwear.  At first you are very pleased with this new arrangement, until you completely sell out of everything and have to make more products.  You realize that the new knitwear price is barely covering the costs and time that you have invested in the knitwear.  With this discovery you decide to start using a yarn that is of a poorer quality (made with acrylics) and you begin using faster more efficient ways to make your knitwear that takes less time.  Now you aren’t losing money but the customers cannot easily purchase a knit item of a higher quality as they could before a price control was set.

So price controls can prevent people from obtaining items they want.  This happens by a decline in product quality and by shortage.

If governments left prices alone reality would take place.  Believe me, reality is not a bad thing.

What if there was a wildfire in your area which left no trees for firewood?  Firewood would go up in price because there was a higher demand for it.  Firewood sellers from out of town would bring their wood to your area since it was in high demand.  With more wood sellers coming into the firewood market the price of firewood would gradually decrease since there are now more ways to obtain wood.  Eventually the wood price will go back to the state it was at previous to the wildfire.

The free market works to the benefit of the people wonderfully.  For more information on how government price controls can drastically cause problems view my essay Government Price Control or Free Market Price Control.

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