Agricultural

Incentives and
Protection
What Are Price Controls?

▹ The term "price controls"

refers to the legal minimum
or maximum prices set for
specified goods. Price ▹ Although it may make
controls are normally certain goods and services
mandated by the more affordable, price
government in the free controls can often lead
market. to disruptions in the
market, losses for
▹ They are usually producers, and a noticeable
implemented as a means of change in quality.
direct economic
intervention to manage the
affordability of certain
goods and services,
including rent, gasoline,
and food.
▹ Understanding
Price Controls
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▪ Price controls are commonly imposed on consumer staples.
These are essential items, such as food or energy products. For
instance, prices were capped for things like rent and gasoline
in the United States. Controls set by the government may
impose minimums or maximums. Price caps are referred to
as price ceilings while minimum prices are called price floors.

▪ Although the reasons for price controls may be affordability

and economic stability, they may have the opposite effect.
Over the long term, price controls have been known to lead
to problems such as shortages, rationing, deterioration of
product quality, and illegal markets that arise to supply the
price-controlled goods through unofficial channels

▪ Producers may experience losses, especially if prices are set

too low. This can often lead to a drop in the quality of
available goods and services.
History of Price
Controls
 “
Price controls aren't a new
concept. They go back thousands
of years. According to historians,
the production and distribution of
grain were regulated by Egyptian
authorities in the third century
B.C. Other civilizations
implemented price controls,
including the Babylonians, the
ancient Greeks, and the Roman
empire.

6
We can find instances of price control
in more modern times, including
during times of war and revolution. In
the United States, colonial
governments controlled the prices
of commodities required by George
Washington's army, which resulted in
severe shortages.

Governments continue to intervene

and set limits on how producers can
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price their products and services. For
instance, municipal governments
often limit how much rent
a landlord can collect from
their tenants and the amount by
which they can increase these rents
to make housing more affordable.
The U.S. government also set price
caps on energy prices during times of
crisis, including World War I and II
and between 1971 and 1973.
Types of Price
Controls
▪ Price controls come in two forms: Price floors and price ceilings.
Price floors are the minimum prices set for goods and services.
They may be set by the government or, in some cases, by
producers themselves. Minimum prices are imposed to help
producers when authorities believe that prices are too low,
leading to an unfair market. Once set, prices can't fall below the
minimum.

▪ Price ceilings or caps are the highest points at which goods and
services can be sold. This occurs when authorities want to help
consumers if they feel that prices are far too high. This is
especially true in the case of rent control when government
agencies want to protect tenants from slumlords and
overzealous landlords. Just like price floors, prices can't go
above ceilings once they're set
Example of Price Controls
▪ Rent control is one of the most common forms of price control.
Government programs establish limits on the maximum amount
of rent a property owner can collect from their tenants. These
limits are also imposed on annual rent increases. The rationale
behind rent control is that it helps keep housing affordable,
especially for more vulnerable people like those with
lower incomes and the elderly

▪ Governments commonly impose controls on drug

prices. This is especially true for life-saving and
specialty medications like insulin. Drug companies
often come under pressure for setting prices too
high. Their rationale is normally patent protection
and to cover the expensive costs of research and
development (R&D) and distribution. Consumers and
governments say this puts certain medications out of
reach for the average citizen
▪ Minimum wages are considered a form of price
control as well. In this case, it is a price floor or the
lowest possible salary an employer can pay to their
employees. Minimum wages ensure that individuals
can maintain a specific standard of living.
 Advantages and Disadvantages of Price Controls Advantages
▪ Price controls are often imposed when governments feel that consumers can't afford goods and
services. For instance, price ceilings are established to prevent producers from price gouging.
This is common in the housing/rental industry and in the drug/health sector
▪ Governments may also set price limits on goods and services if they feel that producers aren't
benefiting from how goods and services are priced in the free market. This allows companies to
remain competitive and ensure that they are profitable

▪ Controlling how prices are set keeps companies from developing monopolies. Companies are
at an advantage and can dictate prices when demand is high (and supply is short). As such,
they may be able to inflate prices to boost their profits. Governments can intervene and set
price ceilings to prevent suppliers from continuing to raise prices, allow competitors to enter
the market, and crush monopolies that exploit consumers.
Disadvantages

▪ Price controls may be enacted with the best of intentions, but they often
don't work. Most attempts to control prices often struggle to overcome
the economic forces of supply and demand for any significant length of
time. When prices are established by commerce in a free market, prices
shift to maintain the balance between supply and demand. Government-
imposed price controls can lead to the creation of excess demand in the
case of price ceilings, or excess supply in the case of price floors.

▪ Critics say that, as a result, price controls often lead to an imbalance

between supply and demand. This can, in turn, lead to shortages and
underground markets. When prices are too low enough for things like
housing, there may not be enough supply, thereby increasing demand.
For instance, landlords may let the condition of
their properties deteriorate because they aren't making enough to
maintain them.
▪ Price controls can lead to losses and a significant drop in quality. When
prices are too low, there's a good chance that producer revenue drops.
They may have to find a way to cut down on costs. Some may choose to
cut down production or may end up putting more inferior products out
on the market. As a result, R&D drops, while newer and more innovative
products stop appearing on the market.

Pros Cons
▪ Protects consumers by ▪ Can lead to shortages and illegal
eliminating price gouging markets
▪ Helps producers remain ▪ May create excess demand or excess
competitive and supply
profitable ▪ Often result in losses for producers
▪ Eliminates monopolies and a drop in quality of products and
services
What Is Meant by Price Control?

▪ Price control is an economic policy imposed by governments that

set minimums (floors) and maximums (ceilings) for the prices of
goods and services in order to make them more affordable for
consumers.
▪ What Are Examples of Price Controls?
Some of the most common examples of price controls include rent
control (where governments impose a maximum amount of rent
that a property owner can charge and the limit by how much rent
can be increased each year), prices on drugs (to make medication
and health care more affordable), and minimum wages (the lowest
possible wage a company can pay its employees).

What Are Price Controls in Economics?

▪ Price controls in economics are restrictions imposed by governments to
ensure that goods and services remain affordable. They are also used to
create a fair market that is accessible by all. The point of price controls is
to help curb inflation and to create balance in the market.
Are Price Controls Good or Bad?

▪ Price controls can be both good and bad. They help make certain goods
and services, such as food and housing, more affordable and within reach
of consumers. They can also help corporations by eliminating monopolies
and opening up the market to more competition. But it can also have a
negative effect, as it may lead to shortages or an overabundance of
supplies, underground markets, and a decrease in the quality of goods and
services available on the market.

The Bottom Line

▪ Unlike the free market, where prices are dictated by supply and
demand, price controls set minimum and maximum prices for goods
and services. Governments and supporters of price controls say that
these policies are necessary in order to make things more amenable
for both consumers and suppliers. By enacting price control policies,
consumers can afford essential goods and services and producers can
remain profitable. But critics say it often has the opposite effect,
leading to an imbalance in the market between supply and demand,
and illegal markets.
our office

Protectionism

16
What Is Protectionism?

▪ Protectionism refers to government policies that restrict

international trade to help domestic industries. Protectionist
policies are usually implemented with the goal to improve
economic activity within a domestic economy but can also be
implemented for safety or quality concerns.
 Understanding Protectionism

▪ Protectionist policies are typically focused on imports but may also

involve other aspects of international trade such as product
standards and government subsidies. The merits of protectionism
are the subject of fierce debate.

▪ Critics argue that over the long term, protectionism

18
often hurts the people and entities it is intended to protect
by slowing economic growth and increasing price inflation,
making free trade a better alternative. Proponents of
protectionism argue that the policies can help to create
domestic jobs, increase gross domestic product (GDP), and
make a domestic economy more competitive globally.
Types of Protectionist Tools

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Import Product Government

Tariffs Quotas Standards Subsidies
Tariffs
▪ Import tariffs are one of the top tools a government uses when
seeking to enact protectionist policies. There are three main
import tariff concepts that can be theorized for protective
measures. In general, all forms of import tariffs are charged to
the importing country and documented at government customs.
Import tariffs raise the price of imports for a country.

▪ Scientific tariffs are import tariffs imposed on an item-by-item

basis, raising the price of goods for the importer and passing on
higher prices to the end buyer. Peril point import tariffs are
focused on a specific industry.

▪ These tariffs involve the calculation of the levels at which point tariff
decreases or increases would cause significant harm to an industry overall,
potentially leading to the jeopardy of closure due to an inability to
compete. Retaliatory tariffs are tariffs enacted primarily as a response to
excessive duties being charged by trading partners.
Import Quotas
▪ Import quotas are nontariff barriers that are put in place to limit
the number of products that can be imported over a set period of
time. The purpose of quotas is to limit the supply of specified
products provided by an exporter to an importer. This is typically a
less drastic action that has a marginal effect on prices and leads to
higher demand for domestic businesses to cover the shortfall.

▪ Quotas may also be put in place to prevent dumping, which

occurs when foreign producers export products at prices lower
than production costs. An embargo, in which the importation
of designated products is completely prohibited, is the most
severe type of quota.
Product Standards

▪ Product safety and low-quality products or

materials are typically top concerns when
enacting product standards. Product standard
protectionism can be a barrier that limits imports
based on a country’s internal controls.

▪ Some countries may have lower

regulatory standards in the areas of 22
food preparation, intellectual
property enforcement, or materials
production. This can lead to a product
standard requirement or a blockage of
certain imports due to regulatory
enforcement. Overall, restricting
imports through the implementation of
product standards can often lead to a
higher volume of production
domestically.
Government Subsidies When seeking to boost a
▹ Government subsidies can come in country’s balance of
various forms. Generally, they may be trade, a country might
direct or indirect. Direct subsidies
also choose to offer
provide businesses with cash payments.
Indirect subsidies come in the form of subsidies to businesses
special savings such as interest-free for exports. Export
loans and tax breaks. subsidies provide an 23

▹ When exploring subsidies, government incentive for domestic

officials may choose to provide direct or businesses to expand
indirect subsidies in the areas of globally by increasing
production, employment, tax, property, their exports
and more. internationally.
 Is Protectionism Left-Wing or Right-Wing
Politics?
What Are Examples of
Protectionism? ▪ Traditionally, protectionism is a left-
wing policy. Right-wing politics
▪ Common examples of generally support free trade, which is
protectionism, or tools that the opposite of a protectionist stance.
are used to implement a Left-wing politics support economic
policy of protectionism populism, of which protectionism is a
part. 24
include tariffs, quotas, and
subsidies. All of these tools
are meant to promote
domestic companies by
making foreign goods more What Are the Arguments for Protectionism?
expensive or scarce. ▪ Lawmakers that favor protectionist trade policies
believe that they protect jobs at home, help support
and grow small companies and industries, and provide
a layer of security to the nation.
THANKS!
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