Question

Why do most economists oppose attempts to control prices? Why does the government attempt to control prices anyway in a number of markets?

Answer 1

Most economist oppose the idea of price controls because it distorts the market. Price controls lead to misallocation of resources in the market. Economist believe that without price control market forces automatically work in way to bring equilibrium in the market by equating demand and supply.

Mainly there are two types of price controls - Price ceiling and Price floor.

In Price ceiling, price is set below the equilibrium level and it cannot exceed that level. This results in higher quantity demanded than quantity supplied in the market. This leads to shortages in the market (demand > supply).

In Price floor, price is set above the equilibrium price level and it cannot get lower than that. This results in greater quantity supplied than demanded in the market. This leads to surplus in the market (supply > demand).

Government usually intervenes directly in the market by setting such price controls as price ceiling and price floors. This is done to manage the affordability of the goods in the market.

Price ceiling are set by government for certain goods because the natural forces in the market sets a price greater than what it should be. Thus to maintain the good's affordability , government intervenes and sets a price ceiling which is price lower than the equilibrium price. Example would be rent control.

Price floor are get by government for certain goods when the market equilibrium sets the price at the level below of what it should be. Thus government intervenes and set a price floor above the equilibrium price. Example would be minimum wages.