In economics, incomes policies are wage and price controls used to fight inflation. (The name arises because this involves control over incomes.) Many or most macroeconomists oppose the use of these controls because since controls interfere with the price mechanism, encouraging inefficiency: they lead to shortages and declines in the quality of goods on the market, while requiring large government bureaucracies for their enforcement. Others argue that they are less expensive (more efficient) than recessions as a way of fighting inflation, at least for mild inflation. (Few see them as helping with hyperinflation.) Yet others argue that controls and mild recessions can be complementary solutions for relatively mild inflation. They work best for those sectors of the economy dominated by monopolies or oligopolies with a significant sector of workers organized in labor unions.
Incomes polices vary from "voluntary" wage and price guidelines to mandatory controls to price/wage freezes. One variant is "tax-based incomes policies" (TIPs), where a government fee is imposed on those firms that raise prices and/or wages more than the controls allow. This is seen as internalizing the external cost of raising prices and/or wages, solving a market failure that encourages inflation.
But despite the frequent use of pricecontrols, and despite the superficial logic of their appeal, economists are generally opposed to them, except perhaps for very brief periods during emergencies.
Prices in fl markets may be above not only the official price, but even the price that would prevail in a free market, because the buyers are unusually desperate and because both buyers and sellers face penalties if their transactions are detected.
Pricecontrols may limit these costs of disinflation by prohibiting wage increases that are out of line with the new trends in demand and prices.
Pricecontrols are undesirable for a number of reasons, most notably their negative effects on the incentives to conduct research and development of new medicines.
Pricecontrols lead to increased waiting times for medicines or a lack of availability of medicines in pricecontrolled countries.
A study by the U.S. Dept of Commerce, which was published in December 2004, found that pricecontrols imposed by OECD countries in the study reduce global R&D expenditures by $5 billion to $8 billion annually (the equivalent of 11 to 16 percent of annual private worldwide pharmaceutical R&D).
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