With the use of real-world examples, evaluate the impact of price controls on consumers and producers
Price controls are government interventions used to set either minimum or maximum prices in markets, typically to address issues of market failure or promote equity. Price floors prevent prices from falling below a certain level, while price ceilings cap prices to keep them affordable. This essay examines the impact of price floors using the example of Scotland’s minimum pricing for alcohol and the impact of price ceilings through New York’s rent control policies, evaluating their effects on consumers and producers.
A price floor is a policy where a minimum price is set above the market equilibrium, ensuring that goods cannot be sold below this level. In Scotland, a minimum unit price of £0.50 for alcohol was introduced in 2018 to address public health issues caused by excessive drinking, particularly among low-income groups purchasing cheap, high-strength alcoholic beverages. The impact of the policy can be shown in the diagram below where price increase to Pmin and total consumption is reduced to Qmin.
For consumers in Scotland, the policy has reduced access to cheap alcohol, decreasing the harmful effects of consuming alcohol which includes both private and external costs. This is expected to reduce alcohol-related illnesses and healthcare costs over time. It is also likely that workers would become more productive contributing further to economic activity and anti-social behaviour related to alcohol consumption would also decrease. In Scotland, the policy has been well received with alcohol related illnesses and crime rates decreasing.
However, the increase in price disproportionately affects low-income households. The policy is therefore regressive in nature. The impact of increasing prices is reflected in the reduction of the consumer surplus from ABC to A. Furthermore, heavy drinkers may not significantly alter their behavior due to the inelastic demand for alcohol, meaning the policy’s intended effects could be limited. Additionally, there is a risk of unintended consequences, such as increased consumption of illicit or unregulated alcohol, which undermines the policy’s goals.
For producers, their profit margins will actually increase as the price has gone up. This is reflected in the increase in producer surplus from ED to EB. High-end alcohol producers may benefit in particular as the price floor narrows the gap between premium and budget options, encouraging a shift toward their products. However, the increased price will create excess supply as quantity demanded has fallen. As a result, some alcohol producers may be forced out of the market and this could lead to the closure of some businesses and thus create job loss.
A price ceiling sets a maximum price below the market equilibrium, typically to make essential goods or services more affordable. Rent controls in New York aim to provide stable and affordable housing for tenants by capping rents on certain properties. The impact of the policy can be shown in the diagram below where price is fixed at Pmax and total consumption is limited to Qmax.
For consumers, rent control ensures affordability by protecting them from rent hikes and displacement. It insures that renters do no get taken advantage of by landlords and as a result they can maintain certain level of disposable income which can be spent on other goods which improves their living standards. This is reflected in the increase in consumer surplus from AC to AB.
However, the benefits are unevenly distributed, favoring existing tenants while new renters face shortages and long waiting lists for affordable housing. This shortage, as shown on the diagram above between Qmax and Qd, is because rent controls can actually reduce housing quantity as the profit motive is restricted. As a result, landlords may choose to not rent out their properties and look into short-term rentals like using AirBnB instead. In New York reated severe housing shortages, has led to skyrocketing rents in the non-controlled market and forcing people to compete for fewer and fewer units.
For producers (landlords), rent controls reduce profitability, particularly for small-scale landlords who rely on rental income. Many may exit the market entirely, further constraining housing supply. The fixed price at Pmax results in a loss of producer surplus from BDE to E. Additionally, rent control disincentivises investment in new housing developments, exacerbating long-term supply issues and worsening affordability. This could be mitigated though if the government were to use other resources to provide state-allocated affordable housing. In addition, the real estate industry attracts significant investment each year, and whilst the returns may decrease, it is unlikely that people will choose to stop investing as it remains a safe and tangible asset.
In conclusion, price controls have multiple impacts on both consumers and produces. Just like with any economic policy, in isolation they might not solve the underlying problem. But when combined with other policies too they could be very effective.