Price fixing means setting up a price for goods and services instead of allowing the supply and demand forces of the market to determine an equilibrium price. It can be a result of the collusion of sellers of the same product or by the public managers to ensure that the most hard-pressed consumers can purchase the items at a ‘fair price.’ For example, when sugar producing factories in Pakistan settle price of sugar it is price fixing by the private entities and illegal in most of the situations. However, when the government fixes a rate of sugar, it is supported by the law. Even Supreme Court of Pakistan had set a maximum price for sugar a couple of years ago and granted legality to all such measures adopted by the public managers.
This is not a new phenomenon as rulers and public managers have been exercising price controls for last 4000 years. However, all such steps have been meeting the same fate of failure. The economists have been proposing different reasons behind the failure of price controls as under:
Fundamentally, supply and demand have to determine the equilibrium price in a free market for economic efficiency purposes. The consumer behavior, weather conditions, individual liking and disliking and availability of quality substitutes are a few determinants of supply and demand for a particular product. That’s why a naturally settled price needs to fluctuate as per requirements of the market and consumers.
However, public managers think that they can fix a ‘fair price’ for goods and services that the sellers should charge. The basic idea of price fixing by the government is against a fundamental block of the managerial economics (microeconomics). Whatever data is collected, the public managers can neither measure imperfection in the market, if any nor can find out the exact price which can be termed as ‘fair price’ vis-à-vis the price determined by the market forces.
Secondly, they can’t adjust prices of goods and services on daily basis (or hourly basis in some circumstances) according to the fluctuating factors.
Furthermore, the public managers fix prices by taking the prevailing market prices into account. Suppose a public manager with a heart for the poor will set $9.00 for a pound of meat while it is available in the open market for $10.00. But no one can guarantee that if the prices are left to the market, the meat shall not be less than $9.00 for a pound.
The history proves that price fixing is a short run measure. As soon as the government relaxes the control, either intentionally or unintentionally, the prices of the controlled goods increase much higher level than in an open market.
If price fixing is adopted for a more extended period, it shall evaporate investment for the controlled goods and services on the one hand and make entry of new competitors challenging to enter in the market on the other.
The economists agree that price controls by the government not only create uncertainty for the investment in the control sector but also destabilize the market. The producer/seller shall get a fixed level of benefit on his produce so he would lose interest in inventing new ways and introducing new technology which could have reduced the cost of production and prices. Besides, the price fixing also increases unemployment rate as new investors would hesitate to invest in the sector fearing unexpected turns in the public policy.
Furthermore, it is natural for business to go for maximization of profits. However, the price controls minimize the profit to the company. The contradiction in goals leads business to withdraw investment from that sector or even go out of the market in extreme cases. After Katrina in the US, many insurance companies went out of business as they failed to maximize their profits.
Price fixing by the public managers leads the consumers to demand more than they need. On the other hand, the sellers shall have less interest in selling the products at the fixed prices so there would be a decline in the supply of the products. The sellers shall try to store it for future when he would be able to charge more than fixed by the public managers.
These phenomena shall naturally result in a shortage of the controlled goods or services and lead to long queues as the people consider it more comfortable to generate more money by purchasing the items at lower prices. Most of the economists agree that the people can earn more money by working in the wasted time for buying controlled products. However, most of the people avoid going through the harder ways.
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