Final answer:
Transfer prices do encourage employees to reduce costs by creating an internal market within a company that simulates competition. However, government price controls may lead to resource misallocation by distorting the true signals of supply and demand.
Step-by-step explanation:
Market controls such as transfer prices are mechanisms used within companies to transact with divisions within their own firm, which can resemble transactions with external parties. These prices can motivate managers and employees to reduce costs and improve efficiency because they create a sense of competition and responsibility similar to that found in open markets. Therefore, it is true that transfer prices encourage employees to reduce costs.
On the other hand, price controls are a form of government intervention meant to regulate prices rather than allowing markets to determine them organically. Price controls can lead to misinformation about product scarcity and result in the misallocation of resources because they do not reflect the true signals of supply and demand changes, similar to killing the messenger and being deprived of vital information.