YOU DECIDE: SHOULD PRICES BE CONTROLLED?

As consumers, we don't like prices. Prices represent the money which we must give up to purchase goods and services. It goes without saying that consumers like low prices rather than high prices.

Consumer preferences for low prices sometimes lead to their support for government price controls. Government price controls put legal limits or ceilings on the prices that businesses can charge.

Economy-wide price controls in the United States have been rare. They have been most frequently used during wars, such as World War II. Price controls on a large number of products were last used in the early 1970s. Today, controls on rents are retained in some cities, and the prices of regulated monopolies, such as electric companies, are limited in most states.

Supporters of price controls say they are needed to make the prices of necessities affordable for citizens. Also, price control advocates say controls prevent businesses from making too high of profits.

So, if price controls are seemingly so attractive to consumers, why aren't they used more frequently? It's probably because there are several major downsides to price controls.

One disadvantage of price controls is their administrative costs. Thousands of government employees and millions of dollars must be used to monitor and enforce economy-wide limitations on prices. Other staff must be hired to determine what the "proper" price control ceilings are on literally thousands of products in the economy.

Administrators of price controls must also contend with the natural reaction of businesses to avoid the limits. A good example comes from the price controls of the early 1970s. Then, plywood producers got around price limits by simply creating a new product. They added holes and grooves to regular plywood, argued that the "new" plywood was not regular plywood, and thus successfully avoided the price ceilings on regular plywood. Of course, putting the holes and grooves in plywood served no useful purpose other than to avoid the controls.

But the biggest disadvantage of price controls is the shortages they can create. Although it may take time for the shortages to develop, if the price controls don't allow businesses to receive the price needed to ensure a certain level of production, production will eventually fall and shortages will occur.

For example, if the government tells apple growers that next year they must accept a 25-percent cut in the price of a bushel of apples, you can bet that fewer apples will reach the market next year. Consumers showing up to buy the cheaper apples will be disappointed to find fewer apples for sale. Ultimately, lines may form around apple bins as consumers scurry to snatch up the precious few apples.

In all of this discussion, it's important to recognize that price controls put limits on the movement of prices, and freely moving prices serve a vital function in our economy. Prices are signals to producers. A rise in the retail price of shoes, for example, signals to shoe manufacturers that consumer buying of shoes is exceeding expectations, and shoe makers will subsequently scramble to make more shoes. Higher prices for a product ultimately motivate producers to move more resources to that market.

If price controls aren't used, then how can consumers be guaranteed that prices will be reasonable and affordable? The answer is competition. Competition between businesses producing the same product ensures that the product's price will be very close to its cost of production. Businesses trying to charge prices far above their costs of production will lose customers to rival firms.

What's to prevent businesses in the same industry from agreeing not to compete on price and thereby charging high prices? The answer is simple and straightforward; such collusion is illegal in the United States. An entire section of the U.S. Justice Department is charged with prosecuting businesses which engage in agreements to set prices.

So although pleasing to the ear, price controls can eventually create big problems for businesses and consumers alike. You decide if some short-term benefits from controls are worth the long-term costs.

Dr. Walden is a professor and North Carolina Cooperative Extension Service specialist at North Carolina State University.You Decide endeavors to provide a balanced look at a variety of economic, public policy and personal finance issues. This feature is provided every two weeks by Dr. Walden and the Department of Agricultural Communications at NC State University.

http://www2.ncsu.edu/ncsu/cals/agcomm/