Implications (Advantages/merits and disadvantages/demerits) of government price control.

Arguments for government control of prices of essential good

• Price stability: resale price maintenance ensures that prices are stable since retailers cannot increase the set prices which are indicated on the commodities. This reduces inflation
• Through maximum price legislation: price control protects the consumer against exploitation by producers because the producer cannot sell the commodity above the price
• Improves customer’s standard of living: it achieved by maximum price legislation which enables customers to afford the commodities
• Controls monopoly: maximum price legislation controls monopoly power in an economy since the prices of the commodities are set below the equilibrium prices and this encourages new firms to join the production process as the monopolists will not be earning too high abnormal profit which tend to increase their economic power
• Stabilization of producer’s income: as price control ensures price stability, this lead to stability in producers income from their sales. This enables them to effectively plan their production activity since they are certain about their expenditure and revenue.
• Reduce income inequality; this is achieved as all produces receive equal incomes from their produce as well as paying the same amount of money on factors of production. Consumers also pay the same amount of money hence reducing income inequality among then
• Save time: resale price maintenance save time that would be spent on bargaining. Customers are aware of the prices and have one option of paying for the commodity or not.
• Minimum price legislation encourages production. Prices are set above the equilibrium prices and this encourages producers to produce more output in order to maximize profit since prices are higher than would be equilibrium price
• Enables fair distribution of commodities across the society: through rationing, price control ensures that essential commodities that are seemingly scare are availed to different people
• Discourages consumption of undesirable goods: when the prices are set high demand for undesirable goods falls reducing consumption.
• Easy to calculate total sales: this benefits the producer in estimating his total sales and revenue since the prices are indicated on the commodities. This helps the tax officials to charge a meaningful corporate tax without under tax or overtax.
• Helps an economy to offset an economic depression by selling a price that is higher than equilibrium price.

Arguments against government control of prices

• Reduces incentives to work hard: the maximum price legislation discourages produced since their prices are set below equilibrium prices. This finally leads to reduced output
• Leads to mal-practices: the fixing prices below equilibrium prices lead to hoarding, black market, bribery, corruption and selling of scarce commodities only to friends.
• Leads to shortage of goods and services on the market caused by increased demand and reduced production
• It leads to unemployment: prices set below equilibrium prices discourage investment and some firms may pull out of business.
• Leads to increased surplus on the market: the minimum price legislation increases the level of output. The surplus leads to wastage of resource.
• Increased cost of living: the minimum legislation increases the prices of commodities
• Increased cost of production: when the price factor inputs are fixed high above equilibrium, it leads to increased cost of production which may force small producers to close down and lead to monopolistic tendencies
• Leads to inefficient allocation of resources: the price mechanism is not allowed to operate freely and this lead to misallocation of resources since the market forces of demand and supply are not allowed to operate freely
• Resale price maintenance denies customers from bargaining price reduction because prices are fixed. Produces may not be able to reduce their prices reducing demand for commodities.