Price Control:

      Price control is a regulatory mechanism used by government to achieve the social economic goals of the country.

    Price control are simply government restriction on prices of goods and services in the market. It is a regulatory tool that aims at controlling the prices of commodities in order to maintain availability of staple foods and prevent inflation of prices during shortages.

     There are two forms of price control : 

    1. Price Ceiling :

          It refers to fixing the maximum price that can be charged for a commodity.

    2. Price Floor:

         It refers to fixing the minimum price that can be charged for a commodity.

 Maximum Price Legislation / Price Ceiling 

   In a competitive market, sometimes businessmen create an artificial scarcity of an essential good with the motive of raising the price of the good in order to maximise the profit. 

   In order to protect the interest of the consumers, the government imposes price ceiling or maximum price, above which no one will sell the commodity. This is called price ceiling or maximum price legislation.

   Definition : 

   Maximum Price Legislation :

      “The highest possible price that producers are allowed to charge consumers for the good or service produced or provided, set by the government”.

•   Price ceiling is the maximum legal price which the suppliers can charge for a particular good or service.

• The government fixes the maximum price in order to make certain essential goods available at affordable price to the lower income group.

• The prices are fixed much below the market determined price i.e. equilibrium price.

• In India price ceiling is generally imposed on certain essential products like wheat, rice, kerosene, oil, sugar etc.

     To understand the policy of price ceiling there are 3 steps of implications of the policy  :

    1. Effect on Price and Quantity

    2. Allocation of available supply

    3. Emergence of Black Marketing

1.  Effect of Price on Equilibrium Price and Quantity :

   When price ceiling is set above equilibrium price, it has no effect on price and quantity.

     In the given figure, curve DD and SS represent the demand and supply curves respectively, while point E is equilibrium point which determine the equilibrium price at OP0 and equilibrium quantity OQ0 for a competitive market.

    When price ceiling is set above equilibrium price (OP1) , there will emerge excess supply (GH) which will pull down the price to equilibrium price OP0 and quantity at OQ0 as equilibrium quantity.

    To be meaningful, price must be set, below the equilibrium price.

    If government fixes a price less then the equilibrium price (OP2), the quantity demanded is (OQ1).

   Therefore, there will develop a shortage of the commodity 

   Shortage = OQ2 – OQ1

                = Q1Q2  

               = KL 

      Therefore, when the maximum price is set below equilibrium price, the quantity demanded will exceed the quantity supplied and there will develop a shortage of the commodity.

   

 2. Allocation of Available Supply: 

    

   b. Allocation by Sellers’ Preference :

       In this method, the shopkeepers will decide who will get the scarce products. 

      Sellers may hoard it under the counter and distribute at only to the favoured customers and friends.

     c. Rationing :

     In an attempt to allocate limited quantity the government may find it wise to adopt a system of rationing.

   Rationing is a system of distribution of a specified quantity of a product at the price fixed by the government.

    The government restricts a quota to each and every individual so that available goods can be distributed equally. 

   The government issues a ration card or a coupon to each family, which enables it to buy specified quantity of the product at the fixed price.

    Example: Ration card issued by government to the families below poverty line, to purchase wheat, sugar etc. at the prices fixed by the government.

    Thus rationing may be justified during war or emergency when scarcity of particular commodity or commodities hits the economy.

   Rationing may be introduced whenever there is a shortage of essential commodities.

3. Emergence of Black Marketing:

     At one hand, price ceiling and rationing benefit the poor, enabling them to get a specified quantity at a lower price fixed by the government. But at the same time price ceiling is likely to give rise to black market.

    Black market is a market in which goods are sold illegally at a price higher than a legally fixed price by the government. 

     Since maximum price is fixed by government there arise an excess demand while the supply is limited. Thus there will arise a situation of shortage.

     There are some consumers who are willing to pay a higher price to get extra quantity, while the sellers want to gain extra profit by selling the product at a higher price.

    How much price will rise in the black market depends on the intensity of demand.

     Buyers are ready to buy the limited quantities OQ1 at the price OM. Thus, OM is the price charged in the black market. 

   In the process, black marketers stand to gain since legal maximum price is much below the black market price. 

    Since government does not allow any transaction above the price ceiling, such transaction can occur only in black market.

  Since not all buyers can  afford to pay such high illegal price, part of the limited quantities would be supplied at controlled price and the rest at illegal price.

     Black marketing emerges against the backdrop of limited supplies. In an attempt to allocate limited quantities the government may find it wise to adopt a system of rationing.

    Floor Price / Minimum Price Legislation / Minimum Support Price: