Discuss the consequences of price controls (fixing) by government in an economy.

A price control is presented in two forms: a price ceiling, where the government dictates a maximum allowable price for a good, and a price floor, in which the government sets a minimum price, below which the price is not allowed to fall.

Price controls can be put on as "binding" or "non-binding." A non-binding price control is not really an economic issue, since it does not affect the equilibrium price. When a price ceiling is set at a level that is higher than the market equilibrium, then it will not affect the price. For example: suppose the government of Zimbabwe decides that it put a ceiling price of bread at $2. The price of the commodity won’t be affected because the price control is above the equilibrium price. The same can be said for price floors that are below the equilibrium price. If the government sets a minimum price of $1.00 per gallon on petrol, it is not going to have any effect because the current price is above $1

Price controls are one way to address issues of market power. In situations where it is felt that the price is relatively high because of monopoly, one of the actions a government can take is to set a maximum price for a commodity. Let's look at a couple of examples. In the mobile telecommunication of Zimbabwe they are three major players, thus Econet, Telecel and Netone. These companies formerly charged $0.25 per minute for voice calls. The regulatory board decided to at some point to put a ceiling price of $0.15 per minute. These companies are combined monopolist who charged exorbitant prices. The result was that voice volumes increased. However the increased use of Social media platforms such as Whatsapp and Facebook limited its growth. The companies also increased the adoption of the cheaper of communication by introducing social media media.

In the case of New York, rent control gave rise to a variety of practices, all of which were opposite the official rules. One was the practice of sub-letting. For instance when lucky enough to have a rent-controlled (that is, cheap) apartment in Manhattan. You get married and start a family, and you decide you want to move out to the suburbs. Normally, a person in this situation would give up his apartment and buy a house in the burbs. However, it is profitable to officially keep your name on the lease, and instead allow somebody else to live in the apartment. Since apartments are scarce, people are willing to pay more than the market price. So maybe you can keep the lease, charge somebody $2,000 to let them live in the building, and pay the landlord the rent-controlled rate, which might be $600 per month. You have a big incentive to keep your name on the lease.

Another practice is "key money," in which case landlords take "under-the-table" payments upfront to allow a person to move into a rent-controlled apartment. There are some other side-effects as well: because landlords can raise the price (by a small amount) when somebody vacates the apartment, they have an incentive to have people move in and out as often as possible, and they have no incentive to spend a lot of money on maintenance, as they are not interested in keeping tenants happy - a rather dysfunctional outcome that should never exist in an uncontrolled market.

Another side effect is that we still have a shortage of housing, and whenever there is a shortage,

government gets called on to fix the problem. In this case, the City of New York built a lot of apartment buildings, which were commonly known as "housing projects" and quickly developed a reputation as being very unpleasant places to live. So, one government policy designed to alleviate market power led to lots of illegal and inefficient practices, lots of unhappy tenants, and the entry of the government into the housing market in a big way. It is fair to say that this is a case where a government trying to fix a problem has ended up making things a lot worse. Rent control is almost gone in New York, but has proved to be very difficult to phase out.

That is, we have more people who want to buy than we have people who are willing to sell. This should be obvious – if the price is lowered, more people will want to buy. So, in this market, the supply is unable to meet the demand. So there is a “Shortage” of the good in question. Only some of the demanders get to buy, but they do get to pay a lower price. We have a new equilibrium, which is at a lower price and quantity than the free-market equilibrium.

Looking at another scenario when they is a “shortage”. In this case they are more buyers than sellers. Usually, the buyers will compete with each other by offering more money. But they are not allowed to, in a price controlled environment. But they will compete in other ways. They will wait in queues longer. They will get out of bed earlier and show up at the shop earlier. They will buy from people on the black market. The people who want the goods the most will compete until they have the goods. Ng This is a scenario where price fixing ends up distorting the market and forcing consumers to rely on the black market, of which they will be buying goods at a price higher that the ceiling price.