Introduction to Economics
Price controls are deemed to be the legally imposed maximum or minimum prices applied and set to specific goods (Powell, 2016). The implementation of these controls acts as a direct economic intercession to control the volume of quantity circulated within the economy, as well as the price charged to consumers by firms. Governments primarily apply price controls on de-merit goods such as tobacco to manage social and private costs ensuring the production and consumption is minimised. This enables the government to utilise price control techniques to diminish and regulate negative externalities. Governments further apply price controls to merit goods such as free school meals to young children in primary education, causing a direct increase in the social and private benefits. Consequently, leading to a welfare gain to society (Powell, 2016). Government intervention is required in specific markets to correct market failure through the use of regulating prices where necessary. I will further discuss the two price control policies that the UK government can apply to influence its agenda in addition to providing examples of cases in which intervention has been functional.
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A price ceiling is regarded as the legal maximum price levied for a good or service. When a price ceiling is enforced below the equilibrium price, quantity demanded will exceed quantity supplied (QD>QS), thus resulting in excess demand or on the other hand a shortage in supply (Schmidtz, 2015). Price ceilings are utilised in markets where the price is considered too high by authorities, therefore purchasing below the market equilibrium enables to promote equity through encouraging more consumption of essential goods or services such as rented accommodation in New York City and Berlin, for example (Neate & O’Carroll, 2015). As illustrated below, the contraction in price causes an expansion in demand, maximising consumption and equity stimulating greater impartiality as a result. This closes the gap of prevalent income inequality in the economy where price exclusion should decline as a governmental target. However, the expansion in demand causes a contraction in supply negatively resulting in inefficiency in the market (Schmidtz, 2015). Consequently, the individuals that are able to secure accommodation at the price level of PMax benefit from this price ceiling. The individuals in the excess demand between Q3 to QD who are willing and able to purchase rented accommodation at the lower price are unable to receive the supply, thus implying a welfare loss in form of pure government failure, incentivising individuals towards black markets. As landlords will be willing to offer accommodation at a slightly higher price than PMax, many individuals in between the excess demand to be prepared to pay at the given level to secure accommodation. This natural consequence of the shortage created by the government is dangerous for consumers as they will potentially be exploited by landlords. Furthermore, the contraction of supply negatively impacts the model as there are likely to be greater volumes of producers building skyrise luxury apartments in place of cheaper rented accommodation therefore driving out more lower income households in a given city (Neate & O’Carroll, 2015). Nonetheless, the lower the prices the quality delivered will also be low. Thus, these are all accumulated issues of operating at a price below the natural equilibrium P1/Q1. Government bodies must pursue enforcement upon illegal activity to prevent landlords from exploiting consumers so that landlords are not charging a price above PMax and lowering standard of quality (Bilotkach, 2014).
IMPACT OF PRICE CEILING ON ACCOMODATION
A price floor is perceived as the lowest legal price that can be charged for a good or service. Price floors are utilised by authorities to discourage the consumption of de-merit goods, such as alcohol. In a free market equilibrium at P1/Q1 there will be an overconsumption and over production of alcohol. The implementation of a minimum price above the market equilibrium, contracting demand, will depress quantity from Q1 to Q* to achieve the socially optimum level of output. Thus, internalising the negative externality, overcoming overproduction and overconsumption issues, to further attain allocative efficiency therefore maximising welfare in the market (Schmidtz, 2015).
An example of minimum pricing applied in a government agenda is when a ban was introduced in Scotland stating alcohol cannot be brought under an unregulated price. A minimum price of 50 pence per unit of alcohol was employed since 1st May 2018 (News, 2018). The prominent argument for imposing a minimum price on alcohol correlates to the negative impact of excessive binge drinking causing negative externalities in consumption leading to failure in this market as well as amplifying social costs. The effects of binge drinking and anti-social behaviour negatively influence third parties and not solely the individuals that over-consume but levy external costs on the National Health Service. Excessive drinking can also result in poor morale and absenteeism within a work place hence lowering labour productivity in the long-term. As illustrated below the marginal social cost surpasses the marginal private cost resulting in a deadweight loss to society. As calculated by University of Sheffield annual costs of alcohol drinking lead to NHS costs of £3.5bn, £11bn due to crime related as a result of alcohol consumption and £7.3bn due to loss in productivity (News, 2018). These circumstances clearly outline how imperative it is that form of government intervention is required. Hence the Scottish government have utilised a price floor to tackle harmful drinking without applying pressure to the average consumer.
Social optimum is where MSB = MSC.
With negative consumption externalities, if consumption of a product reduces benefits enjoyed by third parties, the benefits to society are much fewer than benefits gained by individuals consuming the good. Ultimately, negative externalities cause overconsumption and resulting in overproduction.
It is vital to highlight that government intervention can result in greater government failures. An argument for implementing minimum pricing is that it could cause unintended consequences. For example, imposing a ban on the cheapest forms of alcohol at festivals may potentially lead to consumers consuming substitutional goods such as drugs. If consumers are unable to purchase alcohol at the imposed price the government can expect to see a marginal increase in shadow markets. Furthermore, this could lead to cross border shopping opposed to domestic shopping as consumers will overcome regulation to experience a net financial benefit (Bilotkach, 2014).
The UK government should typically utilise price ceilings and minimum pricing strategies in markets where necessary as this form of price controlling enables authorities to control and dictate the price level and quantity consumed. Inevitably, due to market failures in industries intervention must be required. However, economic efficiencies such as Pareto efficiency through solely utilising these prices controlling method cannot be achieved. Hence it is vital that alongside using price controlling methods, the UK government should involve supply side policies such as subsidies. Subsidies simultaneously will allow effective control in the market of specific goods such as education and public transport, enabling a productively efficient output and price level.
References
Bilotkach, V., 2014. Bulletin of Economic Research. Price Floors and Quality Choice, 66(3), pp. 231-245.
Neate, R. & O’Carroll, L., 2015. The Guardian. [Online] Available at: https://www.google.co.uk/amp/s/amp.theguardian.com/us-news/2015/aug/19/new-york-rent-controlled-homes[Accessed 21 December 2018].
News, B., 2018. BBC News. [Online] Available at: https://www.bbc.co.uk/news/uk-scotland-scotland-politics-43197384[Accessed 29 December 2018].
Powell, R., 2016. In: Edition (2) Economics. Edition (2) ed. s.l.:Hodder Education, pp. 158-180.
Schmidtz, D., 2015. Are Price Controls Fair?. In: Supreme Court Economic Review . s.l.:s.n., pp. 221-233.
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