Price And Wage Controls Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

Wage and price controls are government policies designed to restrict the movement of wages and prices to their natural equilibrium market values. In a free market, prices tend toward an equilibrium value that equates the supply of a good or service with its demand. In conditions of excess demand, shortages cause prices to rise, and in conditions of excess supply, surpluses cause prices to fall. If rising prices are an issue of economic and political concern, consumers may lobby the government for the imposition of price controls known as price ceilings. If falling prices are of concern, it is the producers who may lobby for relief in the form of price floors.

Price Ceilings

Price ceilings are legally established maximum prices that prevent market prices from rising. The irony of such policies is that shortages will result if they are effective because shortages are the source of rising prices. Reductions in supply or rising demand in markets for goods or services in controlled markets will only worsen the shortage problem. History reveals many significant trials of price ceilings. The trials have nearly all yielded the same results: shortages, rationing, black markets, costly implementation and enforcement, and quality deterioration of products. Also commonly known as a price freeze, price ceilings have been used at times as an attempt to control inflation. It was believed that combining price controls with restrictive demand policies would reduce or halt inflation, when, in fact, it is the latter doing the work. Changing a price with a stroke of a pen does not solve the underlying problem of rising prices at its source, whereas reducing demand or increasing supply would.

A price ceiling imposed on gasoline at the beginning of the summer season provides an example of how price controls work. Rising demand from summer travel increases the number of consumers at the pump. An increase in the demand for gasoline increases the demand for the resources used to produce it. With a fixed price, rising costs, and falling profits, gas station owners may simply let the gas pumps run out. The Nixon and Carter gas price controls of the 1970s are well remembered by drivers of that era. Long gas lines, empty pumps, per diem gas purchase limitations, and other such forms of rationing were common. Lower U.S. domestic oil production and exploration were also direct results. In 1981, Ronald Reagan removed gas price controls as one of his first official acts. Gas prices rose immediately, as expected, to their equilibrium levels but then later declined as production increased and consumers found ways to reduce their gasoline use via smaller, lighter, more fuel efficient cars and such strategies as moving closer to work. Despite the lessons learned throughout history, price ceilings are still being implemented. Examples include the energy price controls behind the California energy crisis, rent controls in major cities such as New York and Los Angeles, threats to control health care prices, and the repealed gas tax in Hawaii.

Price Floors

In the case where falling prices are an issue of economic and political concern, producers are the ones who lobby the government for the imposition of price controls known as price floors. Price floors are legally established minimum prices that prevent prices from falling. Examples of such policies include minimum wage legislation and agricultural price supports. Price floors carry the same appeal as price ceilings, an active government intervention into a free market for the sake of fairness. However, for a price floor to be binding, it must be set above the market equilibrium. Prices above equilibrium generate surpluses as producers that otherwise would have dropped out of the market expand production. In order to maintain a price floor, the government must buy the surplus at taxpayer expense. In the case of minimum wage, if it is raised high enough to be binding, individuals who otherwise may not have worked seek employment, and firms, facing rising costs and reduced profits, consider reducing their workforce. This surplus of workers now represents an increase in unemployment.

Bibliography:

Cornwall, John. The Conditions for Economic Recovery: A Post-Keynesian Analysis. Armonk, N.Y.: M. E. Sharpe, 1983.
Holden, K., D. A. Peel, and J. L.Thompson. The Economics of Wage Controls. New York: St. Martin’s Press, 1987.
Schuettinger, Robert. Forty Centuries of Wage and Price Controls: How Not to Fight Inflation. Washington, D.C.: Heritage Foundation, 1979.

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