Why Do Governments Enact Price Controls?

If price controls have negative consequences, why do governments enact them? Let’s revisit our example of President Nixon’s wage and price controls in the 1970s. These price controls were popular, as is demonstrated by Nixon being re-elected after they went into effect. The public didn’t think that the price controls were to blame for things such as long lines at the fuel pump. Without knowledge of the economics behind price controls, the public blamed foreign oil cartels and oil companies for the shortages.
In this video we’ll also address questions such as: do price controls — like rent controlled apartments and the minimum wage — help the poor? Are there better ways to help the poor? If so, what are they? Let’s find out.
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- [man] So far, we've looked at

a number of the consequences
of price controls,

both price ceilings
and price floors.

And most of the consequences,
they're not very good.

Why do governments
enact price controls?

We won't be able to cover
all of the reasons here,

but let's cover a few
of the big ones.

Do you remember how we began
this series of lectures?

With President Richard Nixon,
imposing wage and price controls

throughout the US economy
in August of 1971.

Now again, this was one of the
largest peacetime interventions

into the economy ever.

It was a massive policy with

many, many severe
and serious consequences,

but I haven't yet told
you the rest of the story.

Here's the rest of the story.

In November of 1972,

Nixon won re-election
in a landslide.

So, wage and price controls
were popular.

Nixon was re-elected with
this policy as well as with others.

Now, why is this?

I think in many cases,
in a majority of cases,

the public simply did not connect
wage and price controls

with their consequences.

So, looking around
and the shortages,

the long line-ups for gasoline,

they didn't say the cause of that
is the price control.

What did they think the cause was?

Well, if you look at surveys
from that time,

what was the cause of shortages?

Well, people would say it's OPEC,
it's the Arabs, it's the foreigners,

it's the greedy oil companies.

They're the ones
causing the shortage.

In fact, we know that although
these might be good explanations

in some sense for high prices,

they're certainly not good
explanations for a shortage.

In a free market, we would never
see a shortage.

The cause of the shortage
was the price control,

but the public didn't see that.

The public did not have the benefit
of the great economics education

which you're receiving today.

Moreover, this was not just true
for the American public,

but for people around the world.

Let's take another example.

Here's another example
of price control on oil.

In 2003, Iraq fixed
the price of gasoline

in the country
at five cents per gallon.

Great, great, cheap gasoline, right?

Well no, of course, there were
shortages and long lines,

just as in the United States
during the 1970s.

Indeed, this picture looks like

it might be from
the United States in the 1970s,

except perhaps, for this guy back here.

In fact, it is a picture from Iraq.

Now, whom did the Iraqis blame?

Did they blame the price control?
No.

In fact, just like the Americans
in the 1970s,

they blamed foreigners;

except, this time they blamed
the Americans.

They said, well the Americans
are shipping all of the oil out.

Of course, the real cause of
the shortage was the price control

at five cents per gallon
of gasoline.

Now, one might agree with
everything we've said here so far

but still have the feeling

that maybe price controls
help the poor,

and for some of the poor
this is probably true.

Rent controls, for example,

they help people who have
rent-controlled apartments,

but they make it more difficult
to get an apartment.

There's a real trade-off there.

Moreover, many people
with rent-controlled apartments

are not poor.

There are lots of rich people
in New York City

who have rent-controlled apartments

and who won't give them up

because they're a great deal.

So rent control is not
a very targeted approach

to helping the poor.

Same kind of thing is true
about minimum wages.

Minimum wages help workers
who keep their jobs

at the higher wage,

but they don't help those
who can't find a job

and who are made
unemployed by their higher wage.

Again, there's a trade-off.

Perhaps, even taking into account
the trade-off,

workers would still like minimum wages

but not everybody is benefited.

Moreover, many people

with minimum wage jobs
are not truly poor.

For example, students
and young people

often living at home, often with
part-time jobs and so forth.

This is not to say that

we don't care about
students and young people.

It's simply to say that

the minimum wage
is not very targeted.

It doesn't target the poor.

It targets people who have
minimum-wage jobs,

and not all of them are poor
by any means whatsoever.

Some of them are just young
and starting out in the job force.

Moreover, the response here
to minimum wages and rent controls

is not necessarily that
we shouldn't do anything,

but rather that there may be
better ways to help the poor.

Housing vouchers, for example,
are targeted to poor people

and allow them to pay more for
their rent.

They allow them to buy
any apartments any place

and so forth,

but they add to the purchasing power
of poor people for their rent.

We've a large housing
voucher program

in the United States,
and it's been very successful.

Similarly, wage subsidies are maybe
a better approach

to helping the poor than
is the minimum wage.

We looked at this once before.

Let's very briefly take another
look at wage subsidies

versus the minimum wage.

Remember how we analyzed
the wage subsidy

by putting the subsidy wage
into the diagram

and finding that the wage subsidy
increases the wage received

by workers at the same time as
it reduces the wage paid by firms.

The difference being
made up by the subsidy.

One of the things about the wage subsidy,

of course, it costs the tax payers
when a minimum wage does not.

But notice that the wage subsidy
increases employment to QS.

On the other hand, a minimum wage
at the same wage of $12

as happens with the wage subsidy,

well that actually
reduces employment to QD.

So there may be better ways

of helping the poor
than price controls.

Economists believe not that
we shouldn't help the poor,

but rather that we should try
and do it in a way

which is consistent with markets,
that works alongside markets,

rather than trying
to override markets,

which often leads to unintended
and negative consequences.

If you want to test yourself
click "Practice Questions"

or if you're ready to
move on just click "Next Video."

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