What are the major consequences of each of the price control measures?

The consequences of price control measures are largely linked to changes in the level of output and the
elasticities of supply and demand. Moreover, the imposition of statutory prices has not been much effective in achieving the intended objectives and the following explanations are supportive of this
argument:

1. Maximum price Control (Price ceilings):
a) Institutionalized excess demand over supply of a commodity, which largely translates into
inflation and structural unemployment. In the diagram 6.1 above, excess demand is given by Qd-
Qs.

b) Scope for a black market- this involves selling a product at a price other than the
legislated/statutory price (in an illegal market) preferably to those willing to pay higher prices e.g.
out put Qs at price PBM as shown in Fig 6.1
c) Hoarding and smuggling of products to other countries where prices are relatively high. This
will further create artificial shortages
d) Disincentive to investment as producers are not allowed to maximize their profits and may opt
to invest in industries whose product prices are not controlled, usually non-essential
commodities could be produced in place of necessities.
e) Waste of resources by the government through policing efforts in trying to ensure adherence to
statutory prices.
f) Loss of foreign exchange arising from importation of essential commodities whose domestic
supply is insufficient. This foreign exchange could otherwise be used to import capital inputs
necessary for economic growth and development.
g) Sale by discrimination and rationing of the scarcely available commodities-selling to relatives/
close associates or even subjecting consumers to unnecessary purchase of non-essentials as a
pre-requisite to getting essential commodities. This practice is largely among retailers especially
in rural areas where market information is inadequate. Rationing implies consumption of less
than the amount required. It could also mean going without, a situation, which may lead to such
events as food riots and starvation.

2. Minimum price control (price floors):
a) Institutionalized excess supply over demand for a commodity. In Fig. 6.2, the quantity supplied
is Qs while the amount demanded is Qd. Thus the excess supply is represented by Qs – Qd
b) Increase or distortion on government spending programmes arising form establishment of
buying agencies such as the NCPB, which may not be efficient/cost-effective. It may also
require the setting up of costly storage facilities in the name of buffer stocks so that goods are
released to the public at subsidized prices in the event of a shortage.
c) Dumping – a kind of price discrimination whereby the government buys and exports the surplus
of a commodity at lower prices. This is done especially where the cost of storage is prohibitively
high. Since the acquisition price (minimum price) is relatively higher than the dumping price, the
government is in effect making a "loss"
d) Black marketing also arises due to demand deficiency resulting from higher prices (minimum
price) and the inability of the government to buy the whole amount of excess output. This
coupled with the perishable nature of products makes producers resort to prices lower than the
statutory minimum price, such as PBM in figure 6.2.

As we have seen, both maximum and minimum price controls produce problematic consequences
and may result in a less efficient allocation of resources than might be expected to arise from the
operation of a free market. However, where there are specific problems affecting particular groups in
the economy, such controls might be justified on equitable grounds.

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Wilfykil answered the question on February 4, 2019 at 11:52