Price controls are maximum or minimum prices that governments impose on specified goods. Governments implement price controls when food, oil prices or prices on other essential goods are surging. Price controls, however, can be effective only in the short term. Used over the long term, they usually result in poor quality, rationing or even shortages of the price controlled product. Black markets start to appear once the demand for certain commodities is much higher than the supply.
The term price ceiling refers to the form of price controls when the government imposes limits on the price charged for a specified product. Ceilings try to protect consumers from rising prices which could make necessary goods unattainable. Non-binding price ceiling is when a ceiling is set above the free market price, while a binding price ceiling is a price ceiling set below the free market price.
A price floor is the other form of price control, when the government limits how low a price can be charged for a product. Again, the price floor can be set below or above the free market price. Set below the free market price, the floor has no practical effect, while set above, the price floor has a measurable impact on the market. In this case, the government guarantees prices stay high and the product continues to be made.
Usually the effect of a price ceiling is a shortage and emergence of black markets as quantity demanded exceeds quantity supplied. The price floor effect, in turn, is an excess supply or surplus of the product because consumers pay a higher price and decide to reduce their purchases, while producers find they are guaranteed a higher price than before and they raise production.
A good example of price controls in the United States includes the policies of presidents Nixon and Carter to control prices on gasoline, which caused long lines at gas stations and limits on how much gas could be purchased during the 1970s and the 1980s. These two administrations put in place gasoline price controls in reaction to soaring fuel prices caused by cuts in output by the Organization of Petroleum Exporting Countries. In the words of Thomas Sowell, author of Basic Economics: A Citizen's Guide to the Economy (2007): "Price controls turned a minor adjustment into a major shortage."
Rent controls are another example for price controls, such as those used in New York City. The measures, which took place after World War II (1939-45), were targeted at keeping house prices under control and made them affordable mainly for soldiers who had returned home. In reality, what happened was a supply decrease of rental housing and a rise of existing rental housing prices. Rent controls discouraged new owners of land from entering the market and made existing landlords leave. As a result, the supply of housing was less than the free market would allow and the rent controls pressured more housing rental prices. Rent controls at this time also resulted in lower quality housing because owners had fewer incentives to maintain their property in good condition.
Venezuela has become another example of a country imposing price controls. President Hugo Chavez introduced price controls on a large variety of products, resulting in food shortages. In 2008, the National Guard seized up to 750 tons of food and the president threatened to seize farms and milk plants. He ordered the military to keep people from smuggling scarce food such as milk products into the country, like milk. The military temporarily seized control of all the rice processing plants forcing them to produce at full capacity. The president not only imposed such measures on food products, but also in other industries such as construction.
Minimum wages and regulated agriculture prices are examples of using a price floor. European countries use such measures. For example, in the European Union if a price goes below an intervention price, the EU buys the product and this decrease in supply increases the price to the intervention price level. Therefore, the products go to the EU warehouses and not to those of the European producers.
Producers and suppliers use various strategies to evade price controls. The forms the evasions take depend on the particular good or services put under price control, but in most of the cases the evasions result in poorer quality. Some examples of this kind of strategy includes producers putting fat into food products, reducing the size of products and using inferior ingredients to compensate for the price controls.