Chapter 3 - Price Controls

Nothing shows more vividly the importance of price fluctuations in a market economy that the absence of such price fluctuations when the market is controlled.
Price controls are imposed in order to keep prices from rising to the levels that they would reach in response to supply and demand.
Prices rise because the amount demanded exceeds the amount supplied at existing prices.
Prices fall because the amount supplied exceeds the amount demanded at existing prices.

Price Ceilings And Shortages:

When there is a shortage of a product, there is not necessarily any less of it, either absolutely or relative to the number of consumers.
Some people use the price controlled goods or services more generously than usual because of the artificially lower price, and as a result, other people find that less than usual remains available for them.
Scarcity versus Shortage: One of the crucial distinctions to keep in mind is the distinction between an increased scarcity, where fewer goods are available relative to the population, and a shortage as a price phenomenon.
Hoarding: Individuals keeping a larger inventory of the price controlled goods than they would ordinarily under free market conditions, because of the uncertainty of being able to find it in future.
Black Markets: While price controls make it legal for buyers and sellers to make some transactions on terms that they would both prefer to the shortages that price controls entail, bolder and less scrupulous buyers and sellers make mutually advantageous transactions outside the law.
Quality Deterioration: One of the reasons for the political success of price controls is that part of their costs are concealed.

Just as a price set below the level that would prevail a shortage at the imposed price, so a price set above the free market level tends to cause more to be supplied than demanded, creating a surplus.
Price control in the form of a “floor” under prices, preventing these prices from falling further, produced surpluses as dramatic as the shortages produced by price control in the form of a “ceiling” preventing prices from rising higher.
A surplus, like a shortage, is a price phenomenon. It does not mean that there is some excess relative to the people.
What is crucial from the standpoint of understanding the role of prices in the economy is that persistent surpluses are as much a result of keeping prices artificially high as persistent shortages are of keeping prices artificially low.

Price controls are always a tempting “quick fix” for inflation, and certainly easier than getting the government to cut back on its own spending that is often behind the inflation.
The greater the difference between free market prices and the prices decreed by price control laws, the more severe the consequences of price control.
When local prices spike, that affects supply as well, both before and after the natural disaster.
Appeals to people to limit their purchases during an emergency, like other forms of non-price rationing, are seldom as effective as raising prices.