According to a history of wage and price controls by the Congressional Budget Office, they have never worked more than temporarily. In part that is because they have seldom been accompanied by tighter monetary and fiscal policies, which would get at the root causes of inflation. Rather price controls have served as a substitute for more effective anti-inflation policies. Consequently the underlying inflationary forces continued to build, and prices tended to explode once controls were lifted.
A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it.
Price controls lead to misallocation of goods and encourage rent-seeking. The misallocation effect alone is enough to ensure that consumer surplus is always reduced by a price control in an otherwise-competitive market with convex demand if supply is more elastic than demand; or when demand is log-convex (e.g., constant-elasticity) even if supply is inelastic.
While competitive equilibria do not necessarily exist in such markets when price controls are imposed, we show that stable outcomes do exist and characterize the set of stable outcomes in the presence of price restrictions. In particular, we show that price controls induce non-price competition: price floors induce the trade of inefficiently high quality goods, while price ceilings induce the trade of inefficiently low quality goods.
Minimum wage laws in the U.S. were first introduced during the 1930s in response to the Great Depression. This period was characterized by falling output, falling prices, and falling employment. The National Industrial Recovery Act (NIRA) of 1933 attempted to stop this downward spiral by encouraging the formation of trade association agreements that established price floors and minimum wages. This was the first national attempt to introduce minimum wages in major industries.
Flash Seats allows sports teams to exert total control over who fills their seats, and to fight back against sites like Craigslist, eBay, TicketsNow and StubHub, which have transformed the shady world of ticket scalping into a $3-billion-a-year business.
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time.
Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages.
government regulation of prices by establishing maximum price levels for goods or services, as during a period of inflation.