Upangaji Bei (Price Control); Has it & Can it Ever Work ?

Despite the frequent use of price controls, however, and despite their appeal, economists are generally opposed to them, except perhaps for very brief periods during emergencies. In a survey published in 1992, 76.3 percent of the economists surveyed agreed with the statement: “A ceiling on rents reduces the quality and quantity of housing available.”

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The reason most economists are skeptical about price controls is that they distort the allocation of resources. To paraphrase a remark by Milton Friedman, economists may not know much, but they do know how to produce a shortage or surplus. Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time. Suppose that the supply and demand for wheat flour are balanced at the current price, and that the government then fixes a lower maximum price. The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without.

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Because controls prevent the price system from rationing the available supply, some other mechanism must take its place. A queue, once a familiar sight in the controlled economies of Eastern Europe, is one possibility. When the United States set maximum prices for gasoline in 1973 and 1979, dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline, receiving in the process a taste of life in the Soviet Union. The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled. In 1979, for example, the United States fixed the price of gasoline at about $1.00 per gallon. If the market price had been $1.20, a driver who bought ten gallons would apparently have saved $.20 per gallon, or $2.00. But if the driver had to wait in line for thirty minutes to buy gasoline, and if her time was worth $8.00 per hour, the real cost to her was $10.00 for the gas and $4.00 for the time, an overall cost of $1.40 per gallon. Some gasoline, of course, was held for friends, longtime customers, the politically well connected, and those who were willing to pay a little cash on the side

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The incentives to evade controls are ever present, and the forms that evasion can take are limitless. The precise form depends on the nature of the good or service, the organization of the industry, the degree of government enforcement, and so on. One of the simplest forms of evasion is quality deterioration. In the United States during World War II, fat was added to hamburger, candy bars were made smaller and of inferior ingredients, and landlords reduced their maintenance of rent-controlled apartments. The government can attack quality deterioration by issuing specific product standards (hamburger must contain so much lean meat, apartments must be painted once a year, and so on) and by government oversight and enforcement. But this means that the bureaucracy controlling prices tends to get bigger, more intrusive, and more expensive.

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The most visible price floor in the United States is the minimum wage. The U.S. Congress passed a minimum wage law in 1938 and has raised its level and extended its coverage several times since then. The stated goal of the minimum wage is to help the poor. It will not directly affect most workers because they have wages that are above the minimum. Only those workers who are earning less than the minimum will be directly affected.


A Graph of Price floor indicates that the minimum wage will help some people. Some people, whose wages are below the minimum, will see their wages rise. But others will be harmed. Some people will not be able to find work at the new, higher wage. They will not be hired if the value of the work they can do is less than the minimum wage. These people will become the surplus that a price floor generates. They, however, may not realize the cause of their difficulties, and so may not realize that the minimum wage harms them.

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