Price Controls

Government mandated minimum or maximum prices that can be charged for specified goods. Governments sometimes implement price controls when prices on essential items, such as food or oil, are rising rapidly.

Also known as "price floors" or "price celings".

History has shown that price controls are, at best, effective only on a very short-term basis. Over the long term, they can lead to shortages, rationing, quality deterioration and black markets.

Consider the price controls placed by the Nixon and Carter administrations on gasoline, which led to long lines at the pump and restrictions on how much gas could be purchased during the 1970s.

Rent control provides another example of the ineffectiveness of price controls. Rent controls, such as those used in New York City, are intended to keep housing prices affordable. Instead, they decrease the supply of rental housing and thereby raise prices of existing rental housing. In a vicious cycle, rent controls discourage new landlords from entering the market and cause existing ones to leave, creating a supply of housing that is less than the free market would allow and causing further upward pressure on housing rental prices. Rent controls also reduce the financial incentives for landlords to maintain and improve their properties, leading to lower quality housing.


Investment dictionary. . 2012.

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