Art Carden has a very good piece on price controls and why they persist despite the social harms they create.
Price controls create shortages, and they also drive a wedge between the price of a good or service and what people are willing to pay or accept. Suppose someone is willing to pay $10 for a gallon of gas after a storm but is only allowed to pay $2 in cash. If he values his time at $8 per hour, he will be willing to pay with $2 in cash and an hour of time spent standing in line. The cruel irony of this is that the entire difference between the legal maximum price and the price people are willing to pay for every gallon that is supplied will evaporate as people stand in line for gas. Everyone is unambiguously worse off relative to where they would be without price controls.
I would only add one more important point that dovetails with his argument. Students often ask about the poor who are adversely affected by the price controls increases since they are not able to afford (much) the scarcer good at the higher price. A poor family may value, say, ice at $10/bag, but is unable to pay, say, $8 per bag.
The solution is not to impede prices, which not only leads to an allocation problem, it destroys the incentive for people living outside the adversely affected area to shift more of the now scarcer resource from where they are to areas where there is an excess demand for it. Instead, if the concern is with enabling the poor to obtain some of the now-scarcer resource, subsidize the poor through a cash grant sufficient enough that they can buy some.
Consider the situation where ice normally sells for $2.50 per bag and a hurricane knocks out power to an area, leading to a shortage of ice. As a consequence, the price of ice increases from $2.50 per bag to $8 per bag. A low income family who valued ice at less than $2.50/bag before the hurricane (they weren't buying any before) now values on a daily basis one bag at $10, a second at $8, a third at $6, a fourth at $4, a fifth at $2, and zero for any more than five bags. At $8/bag, this family will buy two bags, but has to sacrifice a large portion of their normal daily consuption to spend $16 per day on ice. (Maybe they have to cut back on milk, etc.)
One solution--the one normally taken and to which Carden refers--is to impose a price control of $2.50/bag on the sale of ice. In doing so, this family buys four bags of ice for $10, bags that are now scarcer due to the increased demand as a consequence of the power outage, and valued more elsewhere. As long as they are willing to spend more time waiting in line (and poorer people tend to have lower opportunity costs of their time), they are more likely to obtain more of the scarce good.
We want people to conserve ice and find alternatives to consuming bags of ice that are valued more for other uses. There is no way of knowing who values ice at what price and who has the least cost viable alternatives for ice without having people act in market exchange. Offering poor families, say, $10 per day as long as the outage persists allows them to consume some ice, yet provides them incentives to not consume ice that is valued more highly elsewhere, as well as finding viable lower cost alternatives to using ice. Any portion of the $10 not spent on ice can be used for other things they value more than ice.
For wealthier families, consider the time spent waiting in line for ice as long as price controls are in effect. Absent price controls, lines disappear and these households are better off by the value they place on their time spent waiting in line. It is this time we all spend waiting in line that is the true social loss due to price controls. Permitting prices to rise simply transfers money from consumers to producers, but waiting in line is an opportunity cost imposed on everyone that is not recovered by anyone anywhere else.
Suppose my time is worth $25 per hour and I want four bags of ice. Waiting in line for one hour makes me worse off by $3. (I could have worked for that hour, earned $25 and then paid $22 more for the 4 bags of ice.) This loss is compounded when waiting in line exceeds one hour. A mutually beneficial solution is to tax, say, 80% of higher income families $2.50 per day and transfer it to the 20% of lower income families, giving each $10 per day. (Yes, in this idealized example I'm dreaming that there are no frictions in wealth transfer schemes.) Such a scheme offers both poor and wealthier houesholds a mutually beneficial alternative to price controls.
Here is a piece I wrote a few years back after North Carolina's attorney general was prosecuting retailers for raising gas prices following damage to refineries in Texas due to a hurricane. Download Steckbeck on Price Gouging 9_24_08
UPDATE: By the way, there is a natural tendency for such transfers to happen voluntarily. In 1998, the National Gallery of Art in Washington, DC had an exhibit of Van Gogh paintings. In order to ensure even low income people were able to view such works, the museum offered a limited number of tickets each day, first come, first served, beginning at (I believe) 9:00 am. Lines of course began forming well before 9:00 and tickets were depleted immediately upon opening. For area residents who worked, and for tourists who did not know of the procedure, seeing such a great body of work was not likely.
Solution: Homeless people and other people with lower opportunity costs of their time (i.e., college students) waited in line and then sold their tickets for (again, I believe) around $20 a piece. The easily duped were outraged that people were profiting from something they obtained for "free." (So much for undersanding the value of time.)
Wealthier households were able to view the exhibit and people with lower cost value for their time were able to consume things they valued more than viewing Van Gogh.
UPDATE 2: But of course there is still the problem of time wasted waiting in line (i.e., the homeless waiting for tickets). A better alternative would have been for the National Gallery to sell the tickets are market prices and then, if they truly desired to subsidize the poor, handing the money over to them.
This is the problem with ticket scalping. Had the artist or venue simply increased the price of tickets there would be no time spent rent seeking. Instead, by selling concert tickets or tickets to sporting events below market prices, time is wasted trying to obtain some in order to profit from it. Better to just raise prices to those willing to pay and handing the money over to scalpers, again, assuming that what actually happens is the intent of the concert or sports promotion agency.