Price control is a system by which the government sets the rate to be paid for a merchandise , or it can establish a minimum and / or maximum price. Thus, companies in the sector must obey these parameters .
In other words, price control is a situation in which the State determines the price or price range to sell a product. Thus, it is required that all transactions follow the established norm.
This type of control is not very common at the moment. However, there are certain goods and services that, because they are related to the welfare of the population, are regulated. We refer, for example, to basic services such as water and electricity.
Advantages of price control
Among the advantages of price control can be mentioned:
- It is a way in which the government ensures that a product is accessible to the population.
- Citizens and businesses will have less uncertainty about how much the merchandise in question will cost.
- It prevents a product of importance for the population from rising strongly due to shortage. Thus, in these cases the State will have to bear the cost of the subsidy.
Disadvantages of price control
However, price control in practice has shown serious disadvantages such as the following:
- If producers must sell below the equilibrium price, the quantity offered will be less than the demand of consumers. Then, shortage will be generated.
- This leads to the emergence of black markets, outside the law, where citizens can buy the scarce product. However, they pay a higher rate than the official one.
- If they cannot charge a price that allows them to make a profit, companies will be discouraged from investing in the controlled sector.
Price control example
An example of price control is, for example, a fixed exchange rate system . Under that scheme, the rate paid for the foreign currency is always the same and is determined by the State.
To achieve this, however, the authorities must intervene by injecting or withdrawing liquidity from the money market. That is, it is a measure that implies a cost to the government.
Another example of price control is that of the minimum wage that is established in many countries. In this case, the objective of the government is that the workers receive an income that allows them to cover their basic needs.
However, one of the criticisms that arises against this minimum wage is that it creates a rigidity in the labor market. That is, if that control did not exist, in theory, companies could hire more workers by paying them a lower pay than the law requires.