What is Price Regulation?

Price regulation is the practice of governments dictating how much certain commodities or products may be sold for both in the retail marketplace and at other stages in the production process. Most common when monopolies or utilities are involved, price regulation sometimes occurs with other products or commodities, either as a specific measure of control or as an emergency economic measure. Supported by many who claim there are products that should be accessible by everyone, price regulation is opposed by others who claim that price regulation stifles investment and innovation.

Capitalist systems generally let the market set the price of any product, with sellers setting a price that consumers are willing to pay, but which provides them enough volume to generate the profit they need. Most governments in those systems adopt a laissez-faire attitude, stepping in only when a commodity is deemed to be essential for all members of society, so its price cannot be left to the whims of profit-oriented companies. For example, in most developed countries, electricity is an absolute necessity, so a purely market-driven system could see electricity prices skyrocket to many multiples of actual prices, without any significant drop-off in usage.

Most developed nations, then, regulate the prices of those commodities that are deemed essential, especially when their distribution is controlled by a small group of companies. Public utilities — primarily the distributors of water, electricity, natural gas and land-line telephone service — are regulated as to the prices they’re allowed to charge for the commodities or services they provide to the public. The key element in such regulations is setting a price that guarantees a reasonable profit in order to avoid driving away those whose investments fund the utility’s research and development components, keeping it competitive. Some necessities, such as gasoline, are not regulated, chiefly because the many competing enterprises in the market create a true market economy pricing structure.

Price regulation is also imposed during times of emergency or financial volatility. During World War II, the United States and some other Allied nations imposed wage and price controls for the duration of the war to keep the domestic economy stable and fight inflation. In 1971, the United States again imposed wage and price controls, freezing both for 90 days in a program that ultimately lasted until 1973. It proved to be ineffective because most manufacturers that applied for permission to increase prices received it, on the ground that they were necessary to meet increases in production costs.

Command economies like communism routinely impose price regulations on a broad range of goods and services. The ultimate effect of price regulation, though, is to reduce supply if the price is too low, thus increasing demand. This is the reason capitalist societies only regulate essential goods and services, and even then, they set the regulations to ensure that the producer earns a reasonable profit.