Price Control

Price Controls Econ 360-002 Sonia Parsa [email  protected] edu G00509808 Word Count: 1540 Abstract This paper examines how, in the United States, the government imposes several forms of taxes and price controls and how all individuals are required to pay direct and indirect taxes. It looks at how the approach of taxation and how the constraints of taxation on goods and price controls affect the U. S. economy. Introduction Regulations have played a huge role in the political and economic world for centuries. There are various different types of regulation. One regulation that the government imposes under its tax policy is price control, which is not considered to be voluntary. Price control can play two different roles, a price ceiling or a price floor. A price ceiling is the maximum price that can be charged in the market for a certain good, causing shortages, and a price floor is the minimum price that can be charged in the market, which then causes surpluses. Measures are usually taken by a government under its regulatory policy to control wages and prices in an attempt to check cost-push inflation and wage-push inflation[1]. However, these policies never help the economy. Instead, it worsens the situation. Governments also impose price controls as an indirect mechanism for taxation. The most well-known price controls enforced by the United States government today are: the policy of minimum wage, rent control, and oil price control. Having enforced price controls generate opportunities for economy failure, i. e. shortages and surpluses, as well as opportunities within the black market, and international arbitrage. The Economic Philosophy When a price control is forced by the government, it’s usually imposed to help or protect particular parts of the population which would be treated inequitably by the unfettered price system. But one must wonder which part of the population, the consumers or the producers? Is it not true that the consumers always feel as if the prices of a good are much higher than their actual value, while producers always feel as if the prices are too low? Price controls are usually justified as a way to help consumers, but whether they actually do is open to debate. Imposed price controls by the government are not only an absolute disaster, but have resulted in dislocating many economies in the past. The key is to recognize that when governments impose price controls; it does not only affect their nation, but also affects parallel imports with their trade partners because of a price â€Å"discrimination,† in regards to tariffs. The Economic Logic The effect of taxation and price controls on the economy vary from the decrease of the supply of goods to an increase in costs and can be demonstrated by a supply-demand analysis (Figure 1). In a free market, the equilibrium selling prices are shown by an upward sloping supply curve (S) with respect to price. The maximum buying prices on the part of the consumer is then shown by a downward sloping demand curve (D) with respect to price. After a quantity of a good is acquired by a consumer, the less important the desire is than before. Therefore, the supplier has to lower the price for each unit as it is sold. Where the supply and demand curve intersects at the margin is called the equilibrium price. In a maximum price control, a deadweight loss occurs in the triangle of a, b, c. pic] For example, when there is a tax imposed on a good like tobacco, there is an increase in the price of the product. This is called minimum price control and the price is not legally allowed to fall below the minimum. This shifts the supply curve of the product to the left. In other words, there are fewer goods available at the same prices than there were before. There is then a decline in the quantity demanded and a new equilibrium between demand and supply is reached. On the other hand when price controls are imposed there is an artificial decline in the prices. At the lower prices, a higher quantity is demanded but the production is insufficient to fulfill that demand and causes a shortage. We can also use the supply-demand analysis to dissect the labor market when a wage-control is placed by the government (shown in Figure 2). By establishing a minimum-wage law, it mandates a price floor above the equilibrium wage; therefore, the rate of unemployment among unskilled workers increases. When wages increase, a greater number of workers are willing to work while only a small number of jobs will be available at the higher wage. Companies can be more selective in whom they choose to employ causing the least skilled and inexperience to be excluded. [pic] Figure 2 assumes that workers are willing to work for more hours if paid a higher wage. We graph this relationship with the wage on the vertical axis and the quantity of workers on the horizontal axis. Combining the demand and supply curves for labor allows us to examine the effect of the minimum wage. We will start by assuming that the supply and demand curves for labor will not change as a result of raising the minimum wage. This assumption has been questioned. If no minimum wage is in place, workers and employers will continue to adjust the quantity of labor supplied according to price until the quantity of labor demanded is equal to the quantity of labor supplied, reaching equilibrium price, where the supply and demand curves intersect. Evidence- Minimum Wage Basic theory says that raising the minimum wage, which is a type of price-control, helps workers whose wages are raised, and hurts people who are not hired because companies cut back on employment. The very first federal minimum wage laws were imposed under the National Recovery Administration. The National Industrial Recovery Act, which became law on June 16, 1933, established industrial minimum wages for 515 classes of labor. Over 90 percent of the minimum wages were set at between 30 and 40 cents per hour. [2] C. F. Roos, who was the director of research at the NRA at that time, estimated that â€Å"by reason of the minimum wage provisions of the codes, about 500,000 Negro workers were on relief in 1934. † Roos added that â€Å"a minimum wage definitely causes the displacement of the young, inexperienced worker and the old worker. [3] By imposing minimum wage rate, free contract in the labor market is shattered. A firm is no longer allowed to pay below the minimum and the laborer cannot accept anything below the minimum that has been set as well. The free-market allows inexperienced workers to obtain entry-level positions, which gives them on the job training, by working for less. With the imposed wage-control, if the monetary compensation falls below minimum, th e trade-off becomes illegal which is a direct violation of a workers liberty to free contract. Thomas Rustici, in his book about minimum wage, makes an excellent point when he states: â€Å"In virtually every case it was found that the net employment effects and labor-force participation rates were negatively related to changes in the minimum wage. In the face of 50 years of evidence, the question is no longer if the minimum wage law creates unemployment, but how much current or future increases in the minimum wage will adversely affect the labor market? †[4] For years we have witnessed the effects of what minimum wages execute, yet we continue to conduct the same mistakes. Conclusion Obligatory price controls by the government are not only an absolute disaster, but have resulted in dislocating many economies all over the world for thousands of years[5]. As economic history has shown us, price controls being effective in a free competitive market are very rare. We either experience shortages or surpluses as a result. Who wins and who loses with an imposed price control? Setting a price control in one country affects other countries around it as well due to parallel imports and personal trafficking. Prices are not just numbers to a free competitive market; they are the expression of the value the supplier sets, no matter how subjective it may be. To regulate or to impose a price control, like any form of regulation, is unconstitutional. In some cases, it either violates the 5th amendment and/or 14th amendment. Price controls, wage controls, and money controls are really people controls. Regimentation at its worst- that is what a socialist dictatorship is all about. I believe that the free market has its own way of equalizing the economy and when the government interferes and sets price ceiling or price floor, it causes a chaos within our economy. Regardless if it results in a dead weight loss or a shortage, the consequences can sometimes be more destructive in the long run. Even if a government believes that price controls are set and affect only their country, it does not; it affects every nation that does any trade with them, exports or imports. The appeal of price controls is understandable. Even though they fail to protect many consumers and hurt others, controls hold out the promise of protecting groups that are particularly hard-pressed to meet price increases. However, when the government has proposed a control, there is a lag in time, causing an economy to become more impaired. References Barfield, C. E. and Groombridge, M. A. â€Å"The Economic Case for Copyright and Owner Control over Parallel Imports. † Journal of World Intellectual Property, Vol. 1 (1998), pp. 903-939 Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis: Liberty Press, 1979), p. 36. Cambridge Pharma Consultancy. Pricing and Reimbursement Review 2003. Cambridge, UK: IMS Health-Management Consulting, 2004. â€Å"Gas Fever: Happiness Is a Full Tank. † Times Magazine 18 Feb. 1974. 19 June 2009 . Grossman, Gene M. , and Edwin L-C Lai. â€Å"Parallel imports and price controls. † RAND Journal of Econ omics 2nd ser. 39 (2008): 378-402. Princeton. Web. 8 Dec. 2009. . Richard M. Alson, J. R. Kearl, and Michael B. Vaughan, â€Å"Is There a Consensus Among Economists in the 1990’s? † American Economic Review 82, no. 2 (1992): 203–209. Rustici, Thomas. â€Å"Public Choice View of Minimum Wage†. Cato Journal, 5. 1) Spring/Summer 1985: 114. ISSN: 0273-3072 Steenhuysen, Julie. â€Å"Drug price controls may shorten lives: report | Reuters. † Business & Financial News, Breaking US & International News | Reuters. com. 16 Dec. 2008. Web. 8 Dec. 2009. . The Power of Oil: The Arab Oil Weapon and the Netherlands, the United Kingdom, Canada, Japan, and the United States Roy Licklider International Studies Quarterly, Vol. 32, No. 2 (Jun. , 1988), pp. 214 ———————– [1] Grossman, Gene M. , and Edwin L-C Lai. â€Å"Parallel imports and price controls. † RAND Journal of Economics 2nd ser. 39 (2008): 378-4 02. Princeton. Web. 8 Dec. 009. . [2] Leverett Lyon, et al. The National Recovery Administration: An Analysis and Appraisal (New York: Da Capo Press, 1972). pp. 318-19. [3] Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis: Liberty Press, 1979), p. 336. [4] Rustici, Thomas. â€Å"Public Choice View of Minimum Wage†. Cato Journal, 5. (1) Spring/Summer 1985: 105. ISSN: 0273-3072 [5] Barfield, C. E. and Groombridge, M. A. â€Å"The Economic Case for Copyright and Owner Control over Parallel Imports. † Journal of World Intellectual Property, Vol. 1 (1998), pp. 903-939