<P> The state of Hawaii briefly introduced a cap on the wholesale price of gasoline (the Gas Cap Law) in an effort to fight "price gouging" in that state in 2005 . Because it was widely seen as too soft and ineffective, it was repealed shortly thereafter . </P> <P> The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply cannot keep up, leading to shortages in the price - controlled product . For example, Lactantius wrote that Diocletian "by various taxes he had made all things exceedingly expensive, attempted by a law to limit their prices . Then much blood (of merchants) was shed for trifles, men were afraid to offer anything for sale, and the scarcity became more excessive and grievous than ever . Until, in the end, the (price limit) law, after having proved destructive to many people, was from mere necessity abolished ." As with Diocletian's Edict on Maximum Prices, shortages lead to black markets where prices for the same good exceed those of an uncontrolled market . Furthermore, once controls are removed, prices will immediately increase, which can temporarily shock the economic system . </P> <P> A classic example of how price controls cause shortages was during the Arab oil embargo between October 19, 1973 and March 17, 1974 . Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel at the low price set by the U.S. Cost of Living Council . The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared . It made no difference whether prices were voluntarily or involuntarily posted below the market clearing price . Scarcity resulted in either case . Price controls fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but such controls do manage to reduce supply . </P> <P> Nobel prize winner Milton Friedman said "We economists don't know much, but we do know how to create a shortage . If you want to create a shortage of tomatoes, for example, just pass a law that retailers can't sell tomatoes for more than two cents per pound . Instantly you'll have a tomato shortage . It's the same with oil or gas ." </P>

Who sets the price of goods and services in a market economy