List of Worldwide Price Control Examples
A price ceiling is a government-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions often occur during periods of natural disasters, high inflation, or in the event of monopoly ownership of a product. Price ceilings create numerous undesirable impacts such as shortages, wasteful search costs, misallocation of resources, and reduction in quality.
There are many examples of price ceilings from around the world and throughout history.
Price Ceilings on Uber in India
India’s current price ceiling and the predictable shortages of rides during peak times are bad for both the riders, drivers, and society, and lead to a deadweight loss because of the misallocation of time, money, human capital, and human potential.
The cost of an Uber in India during peak times was becoming more inflated than the Indian government wished to see. In response to this surge in prices, the Indian government implemented a price ceiling, which capped the amount that Uber could charge during the busiest times of the day. This regulatory action hurt not only Uber drivers but riders and the economy as well. Uber drivers in India were now subjected to work for lower wages, which made them not want to drive as often as before. This is how the riders were also hurt by the price ceiling. With drivers not wanting to work as often, the supply of rides decreased while the quantity demanded increased due to the lower costs. Consumers were willing to pay more due to the decreased quantity supplied and wanted to avoid the inevitable wait times. The shortage of rides that followed greatly inconvenienced riders in India. Wait times for Uber increased and some consumers were forced to explore other options for transportation because they simply did not have enough time to wait. India’s economy suffered from the amount of deadweight loss that accrued, with the misallocation of time, money, and resources leading to an inefficient market.
Price Controls on Water Bottles During Hurrican Sandy (2012)
When natural disasters occur, the supply of clean drinking water can become disrupted. During Hurricane Sandy, to ensure that clean drinking water is available to everyone, governments implement price ceilings on bottled water to prevent price gouging (raising the price heavily after increased demand) in a time of distress. As there is a heavy increase in demand for water bottles during these times the equilibrium price increases, yet the price doesn’t change. The equilibrium price is raised as the demand increases, but since the price stays the same the demand exceeds the supply. Because of this, there is a shortage of bottled water. People who are in need and desperate for water, may not get any because there isn’t enough supply. The ceiling also creates wasteful search costs including people having to spend more time of their day trying to get their hands on water bottles due to the shortage. Whether this is through driving around town checking stores, waiting in line, etc. This occurs because at the quantity supplied, consumers are willing to pay $22, so they will be willing to spend an amount of time valued at $15 (approximately an hour on average) trying to find the product. This time spent is wasted as it benefits no one. There is also a misallocation of resources because, with the price ceiling set at $7, people who aren’t as desperate for water bottles may buy that product (due to the low price) over someone who is more desperate and willing to pay the highest price.
Ticketmaster and other third-party websites are solely to blame for the high prices of seeing our favorite singers and songwriters, such as Zach Bryan. As a musician gains popularity over time, understandably, the prices of their tickets will inevitably rise. However, Ticketmaster and third-party vendors have begun monopolizing the supply and demand of ticket sales, resulting in disproportionately expensive prices. Why do they do this? Because they can. Prior to artists like Bryan, who put a price limit on his tickets to make his shows accessible to everyone on the economic ladder, there were no guidelines surrounding websites like Ticketmaster. This allowed them to sell tickets and then add an almost 30% upcharge to the original price, claiming they were “junk fees.”
New York Rent-Control
Buying an apartment in New York City for an ideal price is not an easy feat. According to the Rent Stabilization and Emergency Tenant Protection Act, rent controls exist for apartment buildings of 6 or more units built between February 1, 1947, and December 31, 1973 (“Rent Stabilization and Emergency Tenant Protection Act.” The Official Website of New York State. https://hcr.ny.gov/rent-stabilization-and-emergency-tenant-protection-act). The only way to inherit a rent-controlled apartment in the city is to obtain it through a family member. A 77-year-old man named Francis Roberts living in New York has lived in his rent-controlled apartment for ages, where he only pays 450 dollars a month. His landlord, as well as surrounding neighbors, have been trying their best to rid him of the building. They have resorted to tactics such as spilling green liquid through the cracks as well as playing music at an extremely high volume. The reason why the landlord is trying to free up the apartment is that the surrounding neighborhood is currently going at an average price of $3,000 and with Francis living there, the rent price cannot be unreasonably raised (Chen, Stephanos. “He Says his Landlord is Harassing him to Leave a $450 Rent-Controlled Apartment.” The New York Times. 28 Nov. 2022). There is a large shortage of rent-controlled apartments in New York, partly because they are hard to come by and partly because when there is one, the owner is very reluctant to let it go. There is a high demand but a very low supply, causing a shortage.
Prescription Drug Prices
Because prescription drugs are indispensable to so many people in the U.S., marginal changes in drug prices do not greatly affect the quantity demanded. This means that the demand for prescription drugs is inelastic, as there are few substitutions for life-saving medicines. Knowing this, pharmaceutical companies began to raise their prices to absurd levels, forcing their customers to pay the difference. However, as prices rose, people with lower incomes or a lesser ability to afford the drugs became unable to pay the higher prices, and they were unable to receive the drugs that they needed to live normal lives. Eventually, the government stepped in, and in 2003, the Medicare Prescription Drug, Improvement, and Modernization Act became law. This act limited the markup of prescription drugs for people on Medicare to 6%. While this does make the available medications more affordable, it simultaneously discourages producers from making more of these life-saving drugs. In the event of a shortage, this also means that the people who most need the drug may not be able to purchase it. To this day, this act remains in place to prevent the overpricing of drugs, but arguably with both advantages and disadvantages.
Price Ceiling on Liquor in Venezuela
A price ceiling was imposed on liquor in Venezuela because the WHO recommended an increase in beverage prices through taxation to promote responsible consumption in 2015. Five years later, when the Covid-19 pandemic hit, the liquor industry almost went bankrupt. However, it was then considered in the economic recovery plans and the taxation stopped for seven months. But then it picked up again and this has led to the illegal trade of alcohol on the Venezuelan-Colombian border. The price ceiling imposed is too high and is causing problems within the Venezuelan economy and impacting the consumption of alcohol. There is now a shortage of legally produced alcohol because it is too expensive for most Venezuelan citizens. Although the taxation of alcohol was imposed for a good reason, which was to get people to drink less, it has only caused illegal trade of alcohol with different countries. There are also wasteful search costs involved with this problem, such as waiting hours in line at a grocery store in order to purchase alcohol among essential goods. There would also be a reduction in quality because at the price ceiling imposed it is harder for producers to gain a profit thus they must reduce the costs of producing alcohol. Finally, there would be a misallocation of illegally produced alcohol because not everyone who wants this alcohol would be able to buy it since it is so hard to get. Overall, while the ceiling was imposed to curb the amount of liquor consumption in Venezuela, all it did was create mass shortages which resulted in the creation of black markets for alcohol, increased wasteful search costs, and a reduction in alcohol produced.
Price Controls in the Canadian Pharmaceutical Industry
Historically, the Canadian government has instituted policies to make medicine and medical treatment accessible to their people. Their Patented Medicine Prices Review Board (PMPRB) reviews prices of all drugs introduced into the country, and mandates price cuts, sometimes causing companies to choose not to launch the drug in Canada. This procedure has caused various drugs to be barred from entering Canadian markets as well as shortages for 29% of all medications sold in 2019/2020 (91% of which had substitutions available). Because an increased number of people are able to afford and purchase the medications without careful consideration, people with a greater need for them can be forced to go without, leading to long wait times. Wasteful search costs also occur in this situation as people needing certain medications under the price ceilings, such as EpiPens, must spend time searching for alternatives to the mainstream brands or providers to find one with some left in stock. In fact, there is a price ceiling of $120 for EpiPens in Canada, while companies in the United States have been known to charge upwards of $600. Quality of care can also decrease under annual budgets allocated to healthcare organizations, causing them to ration care and more frequently recommend cheaper end-of-life solutions like euthanasia. Utilizing the market price can bring about significant advantages. For instance, the market price encourages innovation and investment. In addition, the market price enables efficient allocation of resources such as capital and labor based on demand. If EpiPens were in heightened demand, companies would be incentivized to allocate more resources to produce them. However, the market price could also result in astronomically high prices that are unobtainable for citizens in need.
Earlier this year President Biden presented Congress with a Law that would set the price of Insulin at $35 on Medicare making it more accessible to lower-income individuals. The previous price of Insulin had been rising and was typically around 54 dollars. There is a substantially high and inelastic demand for Insulin because it’s a lifesaving drug for individuals with Diabetes and has no substitutes. In 2020, the average spending for insulin was $54 per prescription but many prices reached as high as $70-$115. Over the past 15 years, the price of insulin has risen by about 4 times and is now worth over 1.03 billion dollars. The bill was proposed back in 2022 and took effect starting January 1st of 2023. With the new price ceiling of insulin costs being at $35 per month, insulin users are paying $19 less than the equilibrium price. There is a large shortage of insulin that occurs due to the demand for the product being higher than usual, which makes it more difficult for Insulin suppliers to keep up. There will be a shortage of about 4 million insulin medications and the wasteful search cost is 114 million dollars. The price consumers are willing to pay for the new quantity supplied is around $75. People have been paying between $70-115 before the price ceiling. As a result, people who need insulin more than others and are willing to pay more, may not receive the prescription. The problem with this price ceiling is that people who spend $35 for insulin may not be getting the best insulin for their body, their condition, and their type of diabetes.
Mexican Government Price Ceiling for Food in 2008
Before 2008, the global economic recession from the U.S. drop in housing prices led to a fall in Mexico’s exports and a deterioration in its terms for trade. Mexico’s economy magnified the impact of shocks, which explains why Mexico entered into a deeper recession than other economies at the time. By 2008, the price of over 150 basic food items such as beans, wheat, and cooking oil were required by law to stay the same for at least a year. President Felipe Calderón announced that “It is a measure that will benefit positively and directly millions of Mexicans …this reflects the commitment Mexican business people have to the country and to price stability.”
Using the consumption per capita in Mexico, multiplied by the population in 2008, the quantities subtract to get 500,000 cans. Marginal willingness to pay is higher than the amount required to pay. People may try to commute to other stores nearby to find out if they have pinto beans. This is wasteful because there might be lines going out of the store to acquire beans.
Everybody knows how hard it is to get concert or sporting event tickets in the resell market as resellers tend to increase the price of the ticket by a large margin. In 2007, Minnesota, Missouri, and New York imposed a price ceiling on tickets sold in the secondary market affecting NHL teams specifically. For upper bowl tickets, the average price was $53.80 whereas the average face value price was $44.20.The price ceiling imposed that resale prices cannot exceed 45% for large arena events and 25% over face value. This evidently caused a shortage which led to a misallocation of resources and a reduction in quality. The people who are die-hard fans, use to be able to pay a very high price in order to get the tickets but with the price ceiling, they cannot. This led to a misallocation of resources as the people with the highest silliness to pay will not get the tickets. Also, this price ceiling on the secondary market caused a reduction in quality as seats that use to offer benefits, free food, and parking, are taken away. This is due to the fact that everyone is paying almost the same price for tickets they cannot give these perks to everyone.
Egg Market in Hungary
In Hungary, the government has implemented price controls on eggs to protect consumers from price fluctuations. The price of eggs is set by the government weekly, based on the cost of production, and retailers are inhibited from charging more than the set price. This policy was implemented to combat a sharp increase in egg prices in 2019, caused by an outbreak of bird flu that reduced the supply of eggs. The price ceiling has mixed opinions. It has stopped excessive price increases for consumers and ensured a stable supply of eggs. But it has led to reduced profits for egg producers and retailers, who are not able to afford the increased costs of production to consumers. This could lead to a decrease in egg production and a shortage. The effectiveness of price controls on eggs in Hungary remains up to debate.
Price Controls on Natural Gas in the United States
Natural gas has been a crucial resource, mainly for heating homes, for the majority of the population of the United States, specifically those who reside in the Northeast and Midwest. However, back in the 1950s, the supply of natural gas could barely keep up with the demand as people all over the country were using it. Even states as far south as Florida had a large demand for natural gas. One surprising fact is that the percentage of homes using natural gas as a heating resource was around the same in the states of Texas and New Jersey, around 40%. As a result, a price ceiling was implemented to try and ease demand and allow for the supply to catch up. Due to the price ceiling, the market suffered from all of the effects but a decrease in the quality of goods with the most prominent being the misallocation of resources. Those who were willing to pay more for natural gas, such as people living in Vermont, weren’t able to purchase it as it was going to residents of other areas. These effects were so drastic that Congress ratified the Natural Gas Policy in 1978 to try and ease regulations on natural gas. As of April 2021, the price per thousand cubic feet of natural gas is around 12 dollars, and the average cost per month is roughly 100 dollars.
2021 Philippines Pork Market
In January 2021, the price of pork increased by 50% as a result of a decrease in supply. This was due to an illness that affected pigs. In reaction to this, the Philippines implemented a 60-day price ceiling on February 8th. Prices of pork butt and pork shoulder were limited to 270 PHP (Philippine peso) per kilogram, and the price of pork belly was limited to 300 PHP. According to research by Statista on domestic pork production and pork imports, as well as economic logic, an initial shortage was likely. The shortage could be estimated to be around 878,000,000 kilograms. Wasteful search costs of around 263,400,000,000 PHP were also a likely outcome of the price ceiling, as people probably had to wait in long lines to buy pork. This is calculated by multiplying 200 PHP (the difference between what customers were willing to pay and what they did pay) by 1,317,000,000 (the new quantity sold). Simply put, suppliers lost around 263,400,000,000 PHP in money that customers were willing to pay instead of waiting in line. Speculatively, due to the elasticity of pork (there are substitutes), a decrease in pork quality would have been unlikely because the quantity demanded would be relatively sensitive to a change in quality. A misallocation of resources was also unlikely to happen on a large scale due to the number of substitutes that pork has. A small amount of pork may have been purchased by a frugal customer niche.
American Oil Crisis in the 1970s
Within the 1970s, Americans across the nation experienced what was known as an “energy crisis.” Throughout the time of this energy crisis, there was a decrease in the supply of oil, and prices “soared.” A major contribution that led to the oil crisis was an embargo placed on oil exports to the United States by Arab producers of the Organization of Petroleum Exporting Countries (OPEC), as well as the threat from this organization to cut back production by 25%. The motivation behind OPEC’s decision came from Arab states that disagreed with President Nixon’s support of Israel during the Yom Kippur War. The White House had projected a nearly 17% loss of the country’s gasoline supply from this decision. Within the months following the embargo, oil prices increased from $3 to $12 per barrel. President Nixon imposed a freeze on oil prices during the peak of rising costs to combat inflation, which resulted in shortages of oil for purposes such as home heating. In addition to price controls, national speed limits and efforts toward finding alternative sources of energy increased.