Basic Economics: A Citizen's Guide to the Economy

By Thomas Sowell | Go to book overview

Chapter 3
Price Controls

Nothing shows the role of price fluctuations in a free market like the absence of such price fluctuations. What happens when prices are not allowed to fluctuate freely according to supply and demand, but instead are set by law, as under various kinds of price-control legislation? Price controls have existed, at one time or another, in countries around the world over a period of centuries -- in fact, for thousands of years -- and have applied to everything from food to housing to gasoline and medical services.

Typically, price controls are imposed in order to keep prices from rising to the levels that they would reach in response to supply and demand. The political rationales for such laws have varied from place to place and from time to time, but there is seldom a lack of rationales whenever it becomes politically expedient to hold down someone's prices in the interests of someone else whose political support seems more important.

Examples include rent control, food price ceilings, and price controls on medical services -- all designed to set a limit on how high prices can go. In addition to laws putting a "ceiling" on how high prices will be allowed to rise, there are also laws establishing "floor" prices, which limit how far prices will be allowed to fall.

Many countries have set limits to how low certain agricultural prices will be allowed to fall, sometimes with the government being obligated to buy up the farmer's output whenever free market prices go below the specified levels. Equally widespread are minimum wage laws, which set a lower limit to how low a worker's wage rate may be. Here the government seldom offers to buy up the surplus labor which the free market does not employ, though it usually offers unemployment compensation,

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Basic Economics: A Citizen's Guide to the Economy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Preface ix
  • Acknowledgements xi
  • Chapter I - What Is Economics? 1
  • Part I - Prices 5
  • Chapter 2 - The Role of Prices 7
  • Chapter 3 - Price Controls 21
  • Chapter 4 - An Overview 39
  • Part II - Industry and Commerce 57
  • Chapter 5 - The Rise and Fall of Businesses 59
  • Chapter 6 - The Role of Profits -- and Losses 73
  • Chapter 7 - Big Business and Government 89
  • Chapter 8 - An Overview 105
  • Part III - Work and Pay 125
  • Chapter 9 - Productivity and Pay 127
  • Chapter 10 - Controlled Labor Markets 149
  • Chapter 11 - An Overview 167
  • Part IV - Time and Risk 173
  • Chapter 12 - Investment and Speculation 175
  • Chapter 13 - Risks and Insurance 193
  • Chapter 14 - An Overview 207
  • Part V - The National Economy 213
  • Chapter 15 - National Output 215
  • Chapter 16 - Money and the Banking System 223
  • Chapter 17 - The Role of Government 237
  • Part VI - The International Economy 267
  • Chapter 19 - International Trade 269
  • Chapter 20 - International Transfers of Wealth 283
  • Chapter 21 - An Overview 297
  • Part VII - Popular Economic Fallacies 303
  • Chapter 22 - Non-Economic Values 305
  • Chapter 23 - Prices and Purchasing Power 315
  • Chapter 24 - Business and Labor 329
  • Chapter 25 - An Overview 343
  • Sources 347
  • Index 359
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