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Why Do Governments Enact Price Controls?

  • 6 minute macroeconomics course presented by Marginal Revolution University.
  • If price controls have negative consequences, why do governments enact them?
  • This video addresses questions such as: do price controls — like rent controlled apartments and the minimum wage — help the poor? Are there better ways to help the poor?
  • This video revisits an example of President Nixon’s wage and price controls in the 1970s.
  • These price controls were popular, as is demonstrated by Nixon being re-elected after they went into effect.
  • The public didn’t think that the price controls were to blame for things such as long lines at the fuel pump.
  • Without knowledge of the economics behind price controls, the public blamed foreign oil cartels and oil companies for the shortages.
  • Price control on oil: In 2003, Iraq fixed the prices of gasoline in the country at 5 cents per gallon.
  • It appears cheaper, but there were shortages and long lines.
  • The Iraqis blamed the Americans, accusing them of shipping all the oil away to their own country.
  • Of course, the real cause of the shortage of oil was a price control of five cents per gallon.
  • Rent control, for example, helps people who have rent-controlled apartments but makes it more difficult to get an apartment:
  1. Many people with rent-controlled apartments are not poor.
  • Minimum wages help workers who keep their jobs at the higher wage but not those who cannot find a job:
  1. Many people with a minimum wage are not truly poor.
  • Often there are better ways to help the poor:
  1. Housing vouchers
  2. Wage subsidies
  • A wage subsidy costs the government money but increases employment and reduces welfare payments.
  • One of the things about wage subsidy, of course, it costs the taxpayers when a minimum wage does not.
  • The wage subsidy increases employment to QS.
  • On the other hand, the minimum wage at the same wage stipulated on government policy will reduce employment to QD.
  • There are better ways of helping the poor than price control.
  • Economists do not believe that we should not help the poor, but rather that we should try and do it in a way which is consistent with markets, that works alongside markets, rather than trying to override markets, which often leads to unintended and negative consequences.

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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

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