Price Controls Goods or Services

Question: Discuss about thePrice Controlsfor Goods or Services. Answer: Introduction Prices play an essential function in the market economy. They indicate the willingness of the clients to pay for a product and producers desire to continue supplying commodities(Kenyon, 2013, p. 90). However, not everyone is contented with prices in the market. For example, the apartment occupants protest that the rents are excessively high, low and mid-income households complain about higher prices of staples while the producers lament that the prices of commodities are too low. As a result, the governments usually intervene in the marketplace through price controls with the objective of correcting such market failures. This paper explores the concept of price controls and the equity rationale of price ceilings in the housing market of the United States. The study culminates by offering an alternative policy measure the governments can employ to address the problem of housing affordability among the low-income earners. Price Controls Price controls refer to government-authorized legal maximum or minimum prices set for particular products(Andersson Sderberg, 2012, p. 159). The prices are usually implemented as a form of direct government intervention in the economy to supervise the affordability of specified goods or services. The price floors and price ceiling are the two types of prices controls. Price Floors The price floors spell out the lowest price the purchasers are required to pay for a service or good. This measure is applied by the government to give the suppliers higher earnings for their produce. The minimum price policy is mostly used to protect the farmers by availing higher incomes(Mankiw Cosgrove, 2014, p. 35). Higher prices and higher tariffs on imports are some of the adverse consequences associated with the price floors. Moreover, this regulation encourages oversupply and results in inefficiency caused by wastage. The introduction of price floors raises the prices above the equilibrium point. The price floors motivate the producers to supply more in the market. On the graph above, the quantity supplied is Q3 while the amount demanded by the consumers is Q2. Hence the different between Q3 and Q2 represents excess supply. Before the introduction of the minimum price, the consumer surplus is represented by triangle PeKC while that of the producer is PeKM. However, the minimum prices change the surplus and result in a deadweight loss, that is, the area marked W. The new consumer surplus is shown by area S while P and G depict the producer surplus. In this scenario, the manufacturer will benefit while consumer loses due to high prices. However, in the long term, the suppliers will produce more than what is required in the market due to weak demand and hence wastage. Price Ceiling The price cap stipulates a maximum price the vendors are permitted to charge for a service or a good. The price cap is usually set below the equilibrium price is intended to protect the consumers from high prices caused by the free market(Bray, 2012, p. 1110). Rent ceiling is a good example of price cap that has been applied in many states like New York in the endeavor to protect the low-income households from the higher rents determined by the landlords. Rent Ceiling The governments often have good intentions when they impose price ceiling, however, the finally outcomes are not always favorable as the household end up suffering more than expected(Poon Garratt, 2012, p. 253). Before the introduction of the rent control, the free market generates Q1 dwelling units which are sold at price P1. However, when the government imposes rent control, that is P3, the rental units the landlords are willing to supply in the market declines to Q3. At lower prices, the households increase their demand for houses. The demand now shifts from Q1 to Q2. Since the demand for homes now outweighs the supply, there is a shortage of housing units. The difference between Q2 and Q3 depicts the scarcity of rental units. Welfare Effect of Rent Ceiling Those consumers who will manage to get rooms benefits since the rents will be low. However, there is a significant loss for both the suppliers and consumers as their surplus will decline on the imposition of price controls. On the graph above, the producer surplus before rent control is shown by area P1NM while that of the consumer is P1NK. After the rent control, the producer surplus is represented by area P and that of the consumer by area C. Consequently, the dead weight loss sets in, that is, area marked D. The dead weight loss results because the individuals fail to get houses and also the landlords receive less money by supplying a few houses. The welfare of both the households and the owners reduces. Rationale Behind Price Ceiling in U.S Apartment Markets Market failure necessitates the intervention of the government to introduce controls meant to correct the inefficiencies. In the housing market, the rents of houses are known to go higher to the extent that the renters find it difficult to secure accommodation. Many low-income earners are the category that suffers most due to hiked rents. For example, they find it difficult to stay near their workplaces especially in the major cities. Therefore, to provide protection to this class of individuals, states in the United States such as New York have implemented rent controls(Rowley, Ong, Haffner, 2015, p. 475). By setting how high rents can reach, the governments ensure that low-income earners can afford houses. Policy to Address the Issue of Housing Affordability Instead of controlling rents, the governments should focus on measures that will increase the supply of dwelling units. For example, the government should ensure an efficient and impartial provision of infrastructure to serviceable lands to encourage the construction of new homes. Roads should be improved to increase the supply of well-situated land for development of new dwelling units. Moreover, the government should work with the private investors and Non-Governmental Institutions to construct homes primarily in cities that are facing a shortage. The state can provide financial support and other tax incentives to the private sectors to motivate them to build houses. With an adequate supply of homes, the prices and rents will be relatively lower to cater for the needs of low and mid-income households. Conclusion The governments often intervene in the market through price controls with the intention of protecting the consumers or the producers. The price floors are meant to safeguard the interests of suppliers whereas the price ceilings are supposed to cushion the consumers. Rent control is an instance of price controls that is common in many states across the world. While this policy has good intentions, the ultimate results worsen the welfare of the renters due to a shortage of housing units. The government should, therefore, focus on strategies that will increase the supply of houses to make the rental apartments affordable. Bibliography Andersson, R., Sderberg, B. (2012). Elimination of Rent Control in the Swedish Rental Housing Market: Why and How? Journal of Housing Research , 159-181. Bray, Z. (2012). The New Progressive Property and the Low-Income Housing Conflict. Brigham Young University Law Review , 1109-1167. Kenyon, P. (2013). Price control, investment and resource allocation. History of Economics Review , 88-95. Mankiw, N. G., Cosgrove, S. (2014). Principles of microeconomics. Stamford, CT: Cengage Learning. Poon, J., Garratt, D. (2012). Evaluating UK housing policies to tackle housing affordability. International Journal of Housing Markets and Analysis, 5(3) , 253-271. Rowley, S., Ong, R., Haffner, M. (2015). Bridging the Gap between Housing Stress and Financial Stress: The Case of Australia. Housing Studies , 30 (3), 473-490.