Evaluating Price Controls

One of the Ten Principles of Economics discussed in is that markets are usually a good way to organize economic. This principle explains why economists usually oppose price ceilings and price floors. To economists prices are not the outcome of some haphazard process. Prices they contend are the result of the millions of business and consumer decisions that lie behind the the supply and demand curves. Prices have the crucial of balancing supply and demand and thereby coordinating economic activity. When policymakers set prices by legal decree they obscure the signals that normally guide the allocation of society’s resources.

 

Another one of the Ten Principles of Economics is that government can sometimes improve market outcomes. Indeed policymakers are led to control prices because they view the market’s outcome as unfair. Price controls are often aimed at helping the poor. For instance rent-control laws try to make housing affordable for everyone and minimum-wage laws try to help  people escape poverty.

Yet price controls often hurt those they are trying to help. Rent control may keep rents low nut it also discourages landlords from maintaining their buildings and makes housing hard to find. Minimum –wage laws may raise the incomes of some workers but they also cause other workers to be unemployed.

Helping those in need can be accomplished in ways other than controlling prices. For instance the government can make housing more affordable by paying a fraction of the rent for poor families. Unlike rent control such rent subsidies do not reduce the quantity of housing supplied and therefore do not lead to housing shortage. Similarly wage subsidies raise the living standards of the working poor without discouraging firms from hiring them. An example of a wage subsidy is the earned income tax credit a government program that supplements the income of law-wage workers.