Price Control on Market Structure

Do you think that the government should have the right to create minimums and limits on how much commodities can sell for? What about if it's beneficial for the economy? And what if it's harmful to the economy? The answer is that it's actually both beneficial and harmful, so great care must be taken with whichever path is decided on in terms of price control and market structure. To learn more about price controls, the effects, examples, and more, continue on!

Price Control and Market Structure Overview

When talking about price controls, the conversation is about limits that are imposed and upheld by the government regarding the amounts in a market that can be charged for products and services. Setting such limits may be motivated by a wish to keep commodities affordable even in times of supply disruptions and to prevent inflation, or even just to guarantee a living wage. When talking about price controls in markets, there are two main types that are seen: price ceilings and price floors.

Price Ceiling

The highest price that a vendor can ask for a service or product is known as the price ceiling. Price ceilings (also known as price caps) are generally implemented during emergencies like environmental disasters or wars. Why? Because these situations frequently result in unexpected price hikes that harm numerous people while benefiting only a select few.

Fig 1. Price ceiling

In Figure 1 above a price ceiling is set at P2, which keeps the price of commodities down. By doing so the government is attempting to protect buyers from the sellers who are only out to make a profit. However, the downside of this is that there is now a shortage of Q2-Q3 in the market as demand exceeds supply at P2.

Price ceilings generally result in inefficiency in the shape of wastage of resources: individuals devote wealth, energy, and time to compensate for shortages linked to price ceilings. The inefficiency is also due to the fact that the commodities being supplied are of consistently poor quality: vendors produce poor-quality commodities at a cheap price although consumers would rather pay a higher price to have a high-quality product.

Price Floor

The price floor is the absolute minimum cost that consumers must pay for a commodity or service. For example, minimum wage is used as a price floor for the rate of pay that reflects the market price of work. Price floors, similar to price ceilings, are meant to aid individuals but have foreseeable and unfavorable consequences. How? Well, the continuous excess that arises from a price floor generates wasted opportunities that are similar to those created by a price ceiling.

Fig 2. - Price Floor

In Figure 2 above a price floor is set at P2, which raises the price of commodities. In the case of wages this would be the minimum wage and would increase the price that workers receive for their labor. By doing so the government is attempting to protect sellers of the goods and services. In case of workers, they are regarded as the sellers of their labor. However, the downside of this is that there is now a surplus of Q2-Q3 in the market as supply exceeds demand at P2.

The Effects of Price Control on Market Structure

Price restrictions are used by governments to guarantee that products and services are offered at a fair price. The free market model works successfully when there are many well-educated buyers buying from various vendors who are able to create a reputation for having excellent or poor-quality commodities. Because of the rivalry between inventors and consumers, this ensures a more fair price. Unfortunately, moments exist where the information (if any) is unavailable to a minimum of one party, or is overall incorrect.

The government then may establish price limits in order to safeguard people from exploitation. Overall, imposing price controls on a well-off, competitive market hurts the community by lowering the volume of business and incentivizing the wastage of resources. Price controls can also impair quality and generate illegal markets as well.

Examples of Price Control

There are many examples of when price controls are used.