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Price Controls, Hugh Rockoff
4 paragraphs found.
 

Not only do producers have an incentive to raise prices, but some consumers also have an incentive to pay them. The result may be payments on the side to distributors (a bribe for the superintendent of a rent-controlled building, for example), or it may be a full-fledged black market in which goods are bought and sold clandestinely. Prices in black markets may be above not only the official price but even the price that would prevail in a free market, because the buyers are unusually desperate and because sellers face penalties if their transactions are detected, and this risk is reflected in the price.

 

The obvious costs of queuing, evasion, and black markets often lead governments to impose some form of rationing. The simplest is a coupon entitling a consumer to buy a fixed quantity of the controlled good. For example, each motorist might receive a coupon permitting the purchase of one set of new tires. Rationing solves some of the shortage problems created by controls. Producers no longer find it easy to divert supplies to the black market since they must have ration tickets to match their production; distributors no longer have as much incentive to accept bribes or demand tie-in purchases; and consumers have a smaller incentive to pay high prices because they are assured a minimum amount. Rationing, as Forrest Capie and Geoffrey Wood (2002) pointed out, increases the integrity and efficiency of a system of price controls.

 

With all of the problems generated by controls, we can well ask why they are ever imposed and why they are sometimes maintained for so long. The answer, in part, is that the public does not always see the links between controls and the problems they create. The elimination of lower-priced lines of merchandise may be interpreted simply as callous disregard for the poor rather than a consequence of controls. But price controls almost always benefit a subset of consumers who may have a particular claim to public sympathy and who, in any case, have a strong interest in lobbying for controls. Minimum-wage laws may create unemployment among the unskilled or drive them into the black market, but minimum wages do raise the income of those poor workers who remain employed in regulated markets. Rent controls make it difficult for young people to find an apartment, but they do hold down the rent for those who already have an apartment when controls are instituted (see rent control).

 

Further Reading

Alston, Richard M., J. R. Kearl, and Michael B. Vaughan. “Is There a Consensus Among Economists in the 1990’s?” American Economic Review 82 (1992): 203–209.
Capie, Forrest, and Geoffrey Wood. “Price Controls in War and Peace: A Marshallian Conclusion.” Scottish Journal of Political Economy 49 (2002): 39–60.
Clinard, Marshall Barron. The Black Market: A Study of White Collar Crime. New York: Rinehart, 1952.
Galbraith, John Kenneth. A Theory of Price Control. Cambridge: Harvard University Press, 1952.
Grayson, C. Jackson. Confessions of a Price Controller. Homewood, Ill.: Dow Jones–Irwin, 1974.
Jonung, Lars. The Political Economy of Price Controls: The Swedish Experience 1970–1987. Brookfield, Mass.: Avebury, 1990.
Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States. New York: Cambridge University Press, 1984.
Schultz, George P., and Robert Z. Aliber, eds. Guidelines: Informal Controls and the Market Place. Chicago: University of Chicago Press, 1966.
Taussig, Frank W. “Price-Fixing as Seen by a Price-Fixer.” Quarterly Journal of Economics 33 (1919): 205–241.