Markets, International Trade & Governments

Markets, International Trade & Governments

Markets, International Trade, & Government
Donna

Governments have stepped in and set minimum and maximum prices ever since they have had control over the populace. Just in the United States alone, governments have predetermined the price of gasoline, added rent control to housing in New York City, and even fixed a minimum on unskilled labors wages. However, sometimes governments may tend to go past simply establishing price floors and price ceilings, and attempt to take over the prices of the general markets. This was done throughout World War I and World War II, as well as during the Korean War in the United States. The attraction of controlling prices is logical. These types of controls offer an assurance of protecting those that might be specifically hard-pressed to endure an increase to prices. Nevertheless, by doing so, the governments may sometimes fall short in shielding consumers and at the same time damage others.
In the first scenario we are faced with the government setting a price ceiling on gasoline. Price ceilings are created to prevent prices of a product from exceeding a set maximum. However, if this is not done with the utmost caution, and the price in which the ceiling is set is below the equilibrium, it can create a drastic shortage of the product. As seen in the graph below, in order to maintain an even flow between price and demand, the government would have needed to set a price ceiling of no less than approximately $50/barrel to avoid shortages back in June of 2012.

For example, 1973 and 1979, the United States set a price ceiling on gasoline, which was below the equilibrium. This caused sellers to sale their gasoline to consumers on a first-come-first-served basis, which also caused many consumers to have to wait in extensive lines to acquire gasoline as well as creating shortages (Rockoff, 2008). This is just one obvious example of the kind of chaos that can be created from the government setting a price...

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