Price Control on Market Structure

Price Ceiling

The highest price that a vendor can ask for a service or product is known as the price ceiling. Price ceilings (also known as price caps) are generally implemented during emergencies like environmental disasters or wars. Why? Because these situations frequently result in unexpected price hikes that harm numerous people while benefiting only a select few.

Fig 1. Price ceiling

In Figure 1 above a price ceiling is set at P2, which keeps the price of commodities down. By doing so the government is attempting to protect buyers from the sellers who are only out to make a profit. However, the downside of this is that there is now a shortage of Q2-Q3 in the market as demand exceeds supply at P2.

Price ceilings generally result in inefficiency in the shape of wastage of resources: individuals devote wealth, energy, and time to compensate for shortages linked to price ceilings. The inefficiency is also due to the fact that the commodities being supplied are of consistently poor quality: vendors produce poor-quality commodities at a cheap price although consumers would rather pay a higher price to have a high-quality product.

Price Floor

The price floor is the absolute minimum cost that consumers must pay for a commodity or service. For example, minimum wage is used as a price floor for the rate of pay that reflects the market price of work. Price floors, similar to price ceilings, are meant to aid individuals but have foreseeable and unfavorable consequences. How? Well, the continuous excess that arises from a price floor generates wasted opportunities that are similar to those created by a price ceiling.

Fig 2. - Price Floor

In Figure 2 above a price floor is set at P2, which raises the price of commodities. In the case of wages this would be the minimum wage and would increase the price that workers receive for their labor. By doing so the government is attempting to protect sellers of the goods and services. In case of workers, they are regarded as the sellers of their labor. However, the downside of this is that there is now a surplus of Q2-Q3 in the market as supply exceeds demand at P2.

The Effects of Price Control on Market Structure

Price restrictions are used by governments to guarantee that products and services are offered at a fair price. The free market model works successfully when there are many well-educated buyers buying from various vendors who are able to create a reputation for having excellent or poor-quality commodities. Because of the rivalry between inventors and consumers, this ensures a more fair price. Unfortunately, moments exist where the information (if any) is unavailable to a minimum of one party, or is overall incorrect.

The government then may establish price limits in order to safeguard people from exploitation. Overall, imposing price controls on a well-off, competitive market hurts the community by lowering the volume of business and incentivizing the wastage of resources. Price controls can also impair quality and generate illegal markets as well.

Examples of Price Control

There are many examples of when price controls are used.

Price Control and Market Structure Mechanism

Price controls are a type of legally-enforced economical interference. They are intended to make items more inexpensive for buyers and are frequently used to guide the market structure mechanism in a specific way. These limits may be thought of as necessary in order to control inflation. Price controls are completely contrary to market forces, which decide prices based on supply and demand.

While price controls might well be justified in terms of cost efficiency and stability, they could actually cause the opposite to be true. Over time, price controls have been shown to cause scarcity, rationing, inferior-quality products, and black markets to sell price-controlled commodities through illicit means. In such cases price controls have an adverse effect on the market structure mechanism.

Examples of Market Structures and Price Controls

There are four different market structures:

• Pure Competition
• Monopolistic Competition
• Monopoly
• Oligopoly

Let's take a look at how the effects of price controls differ between them.

Examples of Market Structures and Price Controls: Pure Competition

In a pure competition market, the market forces (meaning supply and demand) dictate the amount of products and services that will be produced, as well as prices established by key market players. The items sold by various businesses are all the same. An example of this would be farm products like corn.

Examples of Market Structures and Price Controls: Monopolistic Competition

Opposite of pure competition, monopolistic competition doesn't really guarantee the lowest potential price of manufacturing. That minor change allows for significant variances in how the firms function within the market. Monopolistic competition companies sell relatively identical items with minor variances that serve as the foundation for their advertising and sales.

Examples of Market Structures and Price Controls: Monopoly

Monopolies and truly competitive markets are at the opposite corners of the market structure spectrum. But a similarity they have is that both put a focus on promoting profit and reducing costs. In monopoly marketplaces, while ideal competition has numerous rivals, there is only a single supplier. Due to this fact, no competition regarding prices exists.

Examples of Market Structures and Price Controls: Oligopoly

Oligopoly markets have businesses that work collaboratively to reduce competition and control a distinct market or sector. Sizes of these companies can vary. However, the strongest companies frequently are bigger and have patents, money, and resources that they can use to generate obstacles for new companies trying to enter into the market.