ABSTRACT
INTRODUCTION The state frequently intervenes in the market price-setting process. In the UK in recent years, various prices and incomes policies have been used to control the prices of goods and services and of factor incomes. The state also fixes prices in such markets as agriculture, air travel, health, housing, foreign exchange, North Sea oil and gas, roads, university admission and sectors of the labour market (for example, minimum wages and equal pay).1 Each illustrates the application of both positive and normative economics. The former is used to offer predictions about the likely effects of, and the available evidence on, price controls. The latter considers the ‘desirability’ of such controls. Thus, economists might agree about the predicted effects of rent control and minimum wage legislation but disagree about whether such controls should be retained or abolished. This chapter considers why governments attempt to control prices and shows how the basic demand and supply framework can be used to analyse regulation. The analysis is straightforward but the frequency with which governments attempt to set prices and incomes and subsequently express concern about the perverse effects of controls suggests that the message cannot be repeated too often. Examples are taken from rent control and the housing market, minimum wage legislation, equal pay and air travel.
