Why are price controls necessary in select markets or industries?
1 Answer
Generally price controls distort the working of the market and lead to over supply or shortage. However, occasionally they are used for a select markets, agriculture, education (free education or significantly discounted prices in European nations), healthcare with a single payer system setting the price ceiling (the government). While the debate is still open these are selected markets that would benefit from price controls. Note however in free open trade this very hard to pull off, as example consider the wage of say engineers in US trigger labor arbitrage between US and India. This the whole argument behind trade deals and their merit.
Explanation:
Generally price controls distort the working of the market and lead to over supply or shortage. They can exacerbate problems rather than solve them. Nevertheless there may be occasions when price controls can help for example, with highly volatile agricultural prices.
For example, the EU had a Common Agricultural Policy (CAP). This increased the income of farmers by setting minimum prices. It was designed to incentivize farmer to produce independent of the market prices. Similarly US provide agricultural subsidies to US farmers artificially paying more for sugar and corn for the same reason.
