# Understanding Price Controls: Types, Examples, Benefits, and Drawbacks

![Price Controls](https://www.investopedia.com/thmb/cBoJXPRsmZJcDaW1pfhmTSSBTBI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/price-controls.asp-Final-a1ef396a73f54e5c9abf75b0f5c2df76.jpg)

*— Investopedia / Yurle Villegas*

## What Are Price Controls?

Price controls are government-imposed limits on prices for goods and services, typically set through price floors and ceilings. They are designed to maintain affordability, control inflation, and stabilize key sectors of the economy. While price controls can promote economic stability, they may also create market imbalances like shortages or surpluses if prices move away from natural market levels. Price controls date back to ancient civilizations and have been used during modern events like wartime economies and inflationary periods. They are often applied to essential consumer goods, such as food, fuel, and housing, to protect consumers and maintain social stability.

### Key Takeaways

*   Price controls are government-mandated measures that set minimum and maximum prices for goods and services, primarily to manage affordability during economic challenges.  
    
*   While intended to protect consumers, price controls can lead to unintended outcomes such as market shortages, illegal markets, and decreased product quality over time.  
    
*   Historical examples indicate the use of price controls across various civilizations and their roles during wars and economic crises to stabilize economies.  
    
*   Price floors and ceilings are key types of price controls, with floors helping producers with unsustainable prices and ceilings preventing inflated pricing by large corporations.  
    
*   Although they provide immediate affordability, price controls can harm long-term market balance and innovation due to reduced competition and revenue.

## Exploring the Concept and Impact of Price Controls

Price controls are a form of government-mandated economic intervention. They are intended to make important purchases more affordable for consumers and are also commonly used to help steer the [economy](https://www.investopedia.com/terms/e/economy.asp) in a certain direction. For instance, these restrictions may be deemed necessary in order to curb [inflation](https://www.investopedia.com/terms/i/inflation.asp). Price controls differ from market forces, where prices are decided by supply and demand.

Price controls are commonly imposed on [consumer staples](https://www.investopedia.com/terms/c/consumerstaples.asp). These are essential items, such as food, rent, gasoline, or electricity. Controls set by the government may impose minimums or maximums. Price caps are known as [price ceilings](https://www.investopedia.com/terms/p/price-ceiling.asp), and minimum prices are called [price floors](https://www.investopedia.com/terms/f/floor.asp).

Price controls are often implemented to increase affordability and promote economic stability. However, they may have the opposite effect. Over the long term, price controls have been known to lead to problems such as:

*   [Shortages](https://www.investopedia.com/terms/s/shortage.asp) and/or [rationing](https://www.investopedia.com/terms/r/rationing.asp)
*   [Illegal markets](https://www.investopedia.com/terms/b/blackmarket.asp) to supply price-controlled goods through unofficial channels
*   Deteriorating quality as producers try to increase profits or cap losses

> **Important**
>
> Some economists believe that price controls are generally effective only on an extremely short-term basis.

## A Historical Overview of Price Controls

Price controls aren't a new concept. According to historians, the production and [distribution](https://www.investopedia.com/terms/d/distribution.asp) 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.

More recent instances of price controls frequently occur during times of war and revolution. During the American Revolution, colonial governments controlled the prices of [commodities](https://www.investopedia.com/terms/c/commodity.asp) required by George Washington's army, which resulted in severe shortages for civilian populations. Before that, individual colonies would set price controls for a variety of goods, including Massachusettes and Virginia.

Governments continue to intervene and set limits on how producers can price their products and services. For instance, municipal governments often limit how much rent a [landlord](https://www.investopedia.com/terms/l/landlord.asp) can collect from [tenants](https://www.investopedia.com/terms/l/lessee.asp) and the amount by which they can increase these rents each year. These price controls are intended to make housing more affordable. The U.S. government also set price caps on [energy prices](https://www.investopedia.com/articles/active-trading/032515/do-oil-and-natural-gas-prices-rise-and-fall-together.asp) during times of crisis, including World War I and II and between 1971 and 1973.

## Different Types of Price Controls and Their Functions

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. Once these are set, prices can't fall below the minimum.

Minimum prices are imposed to help producers when authorities believe that prices are too low, leading to an [unfair market](https://www.investopedia.com/terms/m/market.asp). This can happen when, for example, large corporations lower prices to unsustainable levels. Large corporations can handle losses better than smaller companies, which may go out of business.

Price ceilings or caps are the highest points at which goods and services can be sold. These are often used when governments want to help consumers because:

*   Inflation has risen sharply.
*   There is an economic crisis.
*   Corporations or large producers may be practicing price gouging.
*   Market prices generally risk becoming unaffordable for most of the population.

This is especially true in the case of [rent control](https://www.investopedia.com/terms/r/rent-control.asp) when government agencies want to protect tenants from overzealous landlords. Just like price floors, prices can't go above ceilings once they're set.

## Real-World Examples of Price Controls

### Rent

Rent control is a common type 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](https://www.investopedia.com/articles/mortgages-real-estate/10/affordable-housing.asp), especially for more vulnerable people like those with lower [incomes](https://www.investopedia.com/terms/i/income.asp) and aging adults.

### Medicine

Governments commonly impose controls on [drug prices](https://www.investopedia.com/articles/investing/020316/how-pharmaceutical-companies-price-their-drugs.asp). This is especially true for life-saving and specialty medications like insulin. Drug companies often come under pressure for setting prices too high. They argue high prices cover patent protection, and costly [research, development](https://www.investopedia.com/terms/r/randd.asp), and distribution. Consumers and governments say this puts certain medications out of reach for the average citizen.

For example, Mylan, the owner of the prescription medication EpiPen (used to treat life-threatening allergic reactions) and Pfizer, Inc., a manufacturer and seller of EpiPen, were the defendants in a price-gauging lawsuit, alleging that they had artificially inflated EpiPen prices to the point where consumers could not afford life-saving medication.

The United States District Court in Kansas approved a $264 million settlement against Mylan and its subsidiaries in 2022. This was after Pfizer settled with plaintiffs for $345 million in 2021. After the lawsuits, several states began imposing price caps on EpiPens to ensure that the medication remained affordable to consumers, including Illinois and Colorado.

> **Fast Fact**
>
> Minimum wages are sometimes 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.

## Pros and Cons of Implementing Price Controls

### Advantages

Price controls can keep vital goods and services affordable for consumers in times of turmoil. For instance, price ceilings are established to prevent producers from [price gouging](https://www.investopedia.com/terms/f/fixing.asp). This is common in the housing/rental industry and the drug/health [sector](https://www.investopedia.com/terms/s/sector.asp). It can also protect consumers during financial crises or after natural disasters.

[Government price limits](https://www.investopedia.com/terms/a/administered-price.asp) can protect producers if they aren't benefiting from how goods and services are priced in the free market, for example, by protecting smaller businesses or farmers who would otherwise be pushed out of businesses by larger corporations. This allows companies to remain competitive and ensure that they are [profitable](https://www.investopedia.com/ask/answers/012715/what-difference-between-profitability-and-profit.asp).

Controlling how prices are set keeps companies from developing [monopolies](https://www.investopedia.com/terms/m/monopoly.asp). Large 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. This allows competitors to enter the market and prevents monopolies that exploit consumers.

### Disadvantages

When prices are established by market forces, they generally shift to maintain the balance between [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp). Government-imposed price controls can lead to the creation of excess demand in the case of price ceilings. This can lead to shortages or illegal markets for goods that aren't otherwise available. Price floors can lead to excess supply, which can create waste in the production chain and cut into producers' profits if goods are unable to be sold.

When prices are too low, producers often experience lower [revenue](https://www.investopedia.com/terms/r/revenue.asp). This can lead lower quality as producers look for ways to reduce costs. Some may choose to cut down production or may end up putting more inferior products out on the market. For example, landlords may let the condition of their [properties](https://www.investopedia.com/terms/p/property.asp) deteriorate because they aren't making enough to maintain them.

Lower revenue can lead to cuts in other areas, like research and development, resulting in fewer new products.

Pros

*   Consumers can afford necessities
    
*   Smaller producers can remain competitive
    
*   Eliminates monopolies
    

Cons

*   Shortages and illegal markets
    
*   Excess demand or supply
    
*   Drop in quality
    
*   Less research and development
    

## What Is Meant by Price Control?

Price control is an [economic policy imposed by governments](https://www.investopedia.com/terms/a/average_cost_pricing_rule.asp) that set minimums (floors) and maximums (ceilings) for the prices of goods and services, The intent of price controls is to make necessary goods and services more affordable for consumers.

## What Are Examples of Price Controls?

Some of the most common examples of price controls include rent control, when the government imposes a maximum amount of rent that a property owner can charge and a limit on how much rent can be increased each year. Another common example is caps on the price of drugs, which are intended to make medication and health care more affordable.

## 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, housing, and medication, more affordable to consumers. They can also help corporations by eliminating monopolies and opening up the market to more competition. But price controls can also have a negative effect, as they may lead to shortages, underground markets, and a decrease in the quality of goods and services available on the market.

## The Bottom Line

Price controls are government-imposed limits on how much certain goods and services can cost. These are set through minimum prices and maximum prices. They are often introduced to make essentials like food, housing, and medicine more affordable and to protect consumers during times of tough times. While price controls can prevent price gouging, support smaller producers, and reduce monopolistic power, they can also lead to shortages, surpluses, or the rise of black markets. Such imbalances may lower product quality and strain economic efficiency over time.

> **Article Sources**
>
> 1.  Federal Reserve Bank of St. Louis. "[Why Price Controls Should Stay in the History Books](https://www.stlouisfed.org/publications/regional-economist/2022/mar/why-price-controls-should-stay-history-books)."
>     
> 2.  National Bureau of Economic Research. "[The Effect of Price Controls on Pharmaceutical Research](https://www.nber.org/digest/may05/effect-price-controls-pharmaceutical-research)."
>     
> 3.  The Roosevelt Institute. "[Price Controls: How the U.S. Has Used Them and How They Can Help Shape Industries](https://rooseveltinstitute.org/wp-content/uploads/2021/11/RI_Industrial-Policy-Price-Controls_Brief-202111.pdf)," Page 5.
>     
> 4.  The American Presidency Project. "[Address to the Nation Announcing Price Control Measures](https://www.presidency.ucsb.edu/documents/address-the-nation-announcing-price-control-measures)."
>     
> 5.  U.S. Government Publishing Office. "[§ 891.185 24 CFR Ch. VIII (4–1–12 Edition)](https://www.govinfo.gov/content/pkg/CFR-2012-title24-vol4/pdf/CFR-2012-title24-vol4-sec891-185.pdf)."
>     
> 6.  Proskauer. "[$264 Million Settlement In EpiPen Price Gouging Litigation](https://www.proskauer.com/blog/264-million-settlement-in-epipen-price-gouging-litigation)."
>     
> 7.  Colorado General Assembly. "[HB23-1002: Epinephrine Auto-Injectors](https://leg.colorado.gov/bills/hb23-1002)."
>     
> 8.  Illinois Senate Democratic Caucus. "[Senator Halpin Caps the Price of EpiPens to $60](https://www.illinoissenatedemocrats.com/caucus-news/80-senator-mike-halpin-news/5121-senator-halpin-caps-the-price-of-epipens-to-60)."
>     
> 9.  The World Bank. "[Price Controls Good Intentions, Bad Outcomes](https://documents1.worldbank.org/curated/en/735161586781898890/pdf/Price-Controls-Good-Intentions-Bad-Outcomes.pdf)," Pages 2-12.