RESTRICTING THE PRICE MECHANISM

Price control changes the structure of property rights and has complex economic consequences that often are unforeseen by economic actors. In a free market, before controls are instituted, prices allocate scarce resources among competing individuals according to the willingness and ability to pay. The question of who gets what is settled on the basis of individual preferences and purchasing power. However, the use of prices to ration the rights to scarce resources frequently conflicts with the selfinterest or ideologies of economic and political actors, who may seek to restrict or even abolish the price mechanism, at least in specific areas. The suspension of the price mechanism calls for some alternative method of rationing, such as direct assignment by the state, rationing by waiting, lottery, fistfights, or warfare. The alternative system of rationing can also be based on social norms and custom – which usually is the case, for example, within the family.

It is important to realize that the system used to ration economic resources affects not only the distribution of wealth in a community but also the overall level of wealth. The behavior of investors and producers is influenced by the methods used to reward them and their degree of control over inputs and outputs in production and so is also the supply of goods and services.

The authorities may interfere with the price mechanism either by subsidizing or restricting the demand and/or the supply of commodities or by directly controlling prices.