Price controls distort economic activity (Extract from “Flaw & Ceillings” …)

Price controls distort the allocation of resources both directly

and indirectly. As discussed in the previous section, the direct
effect is to create persistent shortages or surpluses while reducing
the number of mutually beneficial exchanges that would have
otherwise occurred in the absence of controls. But the implementation
of price controls leads to a series of subsequent, indirect
distortions as well, as people respond rationally to the immediate
and direct effects of the controls.
In the absence of the ability to use prices to ration scarce
goods, alternative mechanisms emerge. For example, shortages
lead to queues resulting from excess demand for the good or
service in question. This dynamic was evident in the centrally
planned economies of Eastern Europe as well as in the US in the
1970s when the government imposed price controls on petrol.
Long queues tend to lead to subsequent government interventions
with rationing schemes. For example, the US government
reacted to long queues for petrol by limiting consumer purchases
of petrol to every second day.
The emergence of crime and black markets are another indirect
negative effect of price controls. Unable to adjust prices
legally, producers and buyers may move into the extralegal market
to engage in exchange. Others, desperate to obtain goods for
which there is a shortage, may engage in theft to obtain goods.
To provide one illustration of black market activities, consider
the case of farmers in the UK in World War II. Facing wartime
meat rationing, many farmers under-reported animal births to
the Ministry of Food and then sold the additional meat in the
black market.
Yet another indirect effect of price controls is evasion, which
can take on a variety of forms. For example, facing a price ceiling,
sellers may charge additional fees or tie-ins to compensate
for the fact that prices are required to be artificially low. There
is also likely to be deterioration in the quality of the product
or service. This may include the substitution of low-quality for
high-quality ingredients in the production of a good or, in the
case of rent controls, maintenance and investment not being carried
out and poor-quality conditions being allowed to develop in
accommodation.
Finally, a legal mandate on prices lowers the cost of buyers
and sellers using non-monetary criteria – e.g. race, gender, religion,
etc. – to allocate resources. Price floors will allow buyers
to indulge their non-monetary preferences while price ceilings
will allow sellers to do so. Consider an example of each to illustrate
this. A minimum wage, which is a price floor, will create an
excess supply – i.e. a surplus – of potential employees willing to
work at the legally mandated wage. In this case employers, the
buyers of labour, can indulge their non-monetary preferences in
deciding who to hire. For example, they may decide to discriminate
against a certain group or type of person in making their
hiring decisions. Due to the price control, they are able to indulge
these preferences precisely because there is a surplus of potential
employees from which to choose.
Now consider the case of a rent control: a price ceiling. In
this case there will be an excess demand – i.e. a shortage – for
flats, which means that sellers can indulge their non-monetary
preferences in choosing among potential tenants. Precisely because
the price control creates an excess demand, landlords can
discriminate and indulge their preferences without suffering
a monetary cost for doing so. Turning away certain potential
tenants based on non-monetary characteristics does not hurt
the landlord because other potential tenants remain due to the
artificially low price.