This blog post examines how government price control, despite violating market principles, plays an essential role in reducing inequality.
Even in a capitalist market economy where price determination is left to free market mechanisms, governments sometimes make efforts to artificially set and maintain market prices for specific goods. This direct government intervention in price formation to achieve specific objectives is called price control. While price control may appear to contradict market economy principles, it becomes essential under certain circumstances. For instance, when markets fail to function normally due to social unrest or natural disasters, price control becomes a vital tool for economic stabilization. If taxation is an indirect regulation where the government influences demand or supply to fluctuate prices and transaction volumes based on the normal operation of market mechanisms, price controls are a direct regulation where the government influences prices and transaction volumes while blocking the normal operation of market mechanisms itself. Such controls play a crucial role in alleviating economic imbalances and reducing the economic burden on specific groups.
Representative methods of such price controls include maximum price systems and minimum price systems. Another reason governments introduce price controls is to achieve social justice. When markets operate freely, social inequalities like income gaps may widen, potentially causing social unrest. When prices surge due to product shortages, governments set upper limits on prices to protect consumers; this system is called a price ceiling, and the price set is the ceiling price. The maximum price is set when the equilibrium price formed by supply and demand in the market becomes too high, so it is lower than the equilibrium price. The equilibrium price is the price established at the point where the quantity demanded and the quantity supplied in the market match. The quantity demanded and supplied at this equilibrium price is called the equilibrium quantity. However, because of this, a supply shortage occurs in the market, and consumers cannot purchase goods as much as they desire. The greater the difference between the maximum price and the equilibrium price, the more severe the supply shortage becomes. Consequently, this supply shortage can cause unfair distribution among consumers, potentially becoming a source of social conflict.
In such a state, consumers try to purchase goods even at prices higher than the maximum price, leading to the problem of black markets forming. Since black markets operate outside the official economic system, they negatively impact government tax revenue. This can cause another economic imbalance. Conversely, a minimum price system refers to a government policy where the government sets a minimum price and controls prices to prevent them from falling below that level. The purpose of establishing a minimum price system is to protect producers’ interests; examples include agricultural price support systems. The minimum price system plays a crucial role in stabilizing farmers’ livelihoods, particularly for commodities like agricultural products that experience significant price volatility. However, since the minimum price is set higher than the equilibrium price that would form in the market, it causes the problem of excess supply. This excess supply leads to economic inefficiency, and if the government fails to address it, it can result in unnecessary waste of resources.
To solve the problems arising under a price ceiling, artificial allocation methods can be used, the most representative being the first-come-first-served method and rationing. The first-come, first-served method sells goods to consumers in the order they arrive until supplies run out. The rationing system distributes ration cards to each consumer, allowing them to purchase goods only up to the amount specified on their card. Although this rationing system aims for fair distribution of goods, it can lead to dissatisfaction because consumers may not receive the quantity they need. In practice, both first-come-first-served and rationing are often used together because supply diminishes over time. This decline occurs because artificially low prices cause some producers to abandon production of that good as time passes. When producers cannot receive fair compensation in the market, they are more likely to abandon that good and shift to other economic activities.
Two approaches can be used to resolve problems arising under minimum pricing: increasing demand or reducing supply. Examples of the first approach include the government using reserve funds to purchase all excess supply, or distributing vouchers free of charge to the poor that can be exchanged for the excess goods. Such demand-stimulating policies can alleviate excess supply problems in the short term but may burden government finances in the long run. An example of the second approach involves encouraging producers to reduce output while guaranteeing only the value of goods that would have been produced by idle facilities. Supply reduction policies can enhance economic efficiency, but producers may become dissatisfied due to uncertainty about the future, potentially leading to reduced production.
