Government Price Controls

As the holy month of Ramdhan approaches, the prices of the essential commodities soar up in Pakistan. The government price control measures are adopted to provide essential commodities to the most underprivileged sector of the society on the lower prices than the market. Even the prices in the markets are fixed and huge bureaucratic machinery is moved to enforce the prices. It is considered that such measures bring ‘stability’ in prices of the essential commodities. The enforcement is measured by volume of fines and sentences awarded to the violators. 

Such measures are generally supported by the media, politicians and public functionaries. When I asked Prof. Mukul Ashar from the National University of Singapore, he said that such measures could be termed successful only when they tackle the issue forever. In fact price control measures like price fixation, subsidies and support prices are enforced all around the year for one reason or the other, but they don’t seem to resolve the problems permanently.

Isn’t the fact that benefits of these measures reach to the pressed ones only on a limited level? The primary beneficiaries of the measures become the better of people in the society.

There are two types of price controls; price ceiling where maximum price is set to be charged and price floor that can be charged. The price floor is generally fixed for agricultural. The minimum wages are also a price floor.

Price equilibrium (P0) is the price which sellers and buyers settle for an item having D demand and S supply. On Price floor (Pf), the demand falls to Qdf while supply increases by Qdf which results in the surplus and economic inefficiency. On Price ceiling (Pc), the demand increases to Qdc and supply falls to sc hence results in shortage and inefficiency. During Ramdhan the demand curve shifts and supply goes down to create the shortage of many items. The government has to utilize huge bureaucracy to control black marketing. 

Rationale for Price Controls

Price Celining Price Floor

The government price controls are applied all over the world. Historically, not only the Indian Kings but also the communist countries have gone for such baits during the cold war. Capitalist countries including the United States and others went for price controls massively in the 1970s. 

As soon as Ramdhan approaches in Pakistan, the demand for pulses, flour, vegetables and fruit increases all over the Muslim world. The natural result of a free market economy should be a settlement of price at the next level by mutual interaction of consumers and suppliers. However, such settlement is not allowed as governments fear a market failure. The media and public are used to experience such a measure for decades, so pressure groups exert their pressure for the formulation of public policy. The government fixes a ceiling for some specific essential commodities. This result in higher demand and lower supply which results in the shortage of these items.

Last night, while discussing the role of supply and demand one of my friends pointed out that the sellers create a shortage by hoarding the products. It may be correct because the prices fixed by the government forces the suppliers to hold their supplies for better times. The sellers may be unable to meet the higher demand due to lower price as in case of local vegetable production.

Besides, we can’t ignore effects of rates of inflation, interest, and unemployment on prices. Similarly, the monetary policies and production areas of a country also influence the cost of living in any country. Furthermore, law and order, the war on terror and relations with next door neighbor can also pressurize supplies of different products in different periods of time.

Why Price Controls Fail (1)

Why Govt. Price Mechanism Fails (2)

A Case for Price Ceiling

Price Floor

Public Policy Options

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