Changes

During World War II, the government imposed controls to prevent companies from raising prices during the war.  The needs of our military for goods increased demand that would ordinarily shift the demand curve and increase prices.  But the government prohibited this from happening by limiting price increases.  "Price controls" are limits on the prices at which certain goods can be sold.

During World War II, the government imposed controls to prevent companies from raising prices during the war.  The needs of our military for goods increased demand that would ordinarily shift the demand curve and increase prices.  But the government prohibited this from happening by limiting price increases.  "Price controls" are limits on the prices at which certain goods can be sold.

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases.

Controls on prices (and also wages) were also imposed to control inflation (increases in all prices) in the early 1970s.  A war in the Middle East, and assistance in that war by the United States of Israel, caused the Arab nations to reduce their supply of oil to us.  That created gasoline shortages and increased energy costs, which then drove up inflation.  Price controls were designed to limit the increases. But as the graph below illustrates, price controls create shortages:

<insert graph of price controls>

 

When a price control causes a difference between the supply quantity and the demand quantity, it is the lower quantity that becomes the market.  The market can never be more than the lesser of the quantity in supply or quantity in demand.  Because the quantity supplied is much less than the quantity demanded, a shortage results.

Rent control in New York City is an example of a price control that has terrible effects.  The people lucky enough to be a rent controlled apartment pay much less than the market rate, and never move out.  New housing is not created as quickly as it should be, because landlords are not sure they will be able to charge the market rate.  Earlier this year one commentator said this about New York City's rent control:<ref>[http://meganmcardle.theatlantic.com/archives/2009/02/out_of_control.php Megan McArdle, ''The Atlantic'']</ref>   

Rent control in New York City is an example of a price control that has terrible effects.  The people lucky enough to be a rent controlled apartment pay much less than the market rate, and never move out.  New housing is not created as quickly as it should be, because landlords are not sure they will be able to charge the market rate.  Earlier this year one commentator said this about New York City's rent control:<ref>[http://meganmcardle.theatlantic.com/archives/2009/02/out_of_control.php Megan McArdle, ''The Atlantic'']</ref>