Managerial Economics case study

report
Assessment 1: Case Study Report

1. Section 1: Summary of price controls and why they are required

Price controls:

Price controls date back a long time, to the Middle Ages. Grain production and distribution
were supposedly supervised by Egyptian officials in the third century B.C., according to
history. Price restrictions were also used by the Babylonians, ancient Greeks, and the
Romans.

They are a type of economic intervention required by the government. Consumers benefit
from them since they help keep prices down while also helping to push the economy in a
specific direction.

Why are price controls required?

 Many industrialised economies and emerging market and developing countries

(EMDEs) use price restrictions.
 For energy and food-related commodities, they are significantly more prevalent in
EMDEs than in advanced nations.
 The comparatively high frequency of various forms of price controls in advanced
economies reflects the higher prevalence of controls for services like telephones.
 The level of price restrictions varies significantly between countries, even though in
EMDEs they tend to be stricter than in advanced economies.
 Basic foodstuff prices are usually subject to price controls as well.
 LICs have a higher prevalence of this practise than other EMDEs: nearly all LICs
implement price limits on some food products, compared to around three-quarters
of other EMDEs.
 A small number of EMDEs use price controls on building supplies.

2. Section 2: Price control reforms in various countries

The reforms, varied greatly in terms of their scope and speed of deployment. They
differed as well in terms of compensating payments to disadvantaged populations.
When the conditions that prompted the implementation of price controls are eased,
it becomes easier to remove them. Some nations, for instance, removed limits when
food prices fell from cyclical highs in 2011.

 Some MENA nations implemented or tightened food price controls in 2011 in

response to social tensions following the Arab Spring.
 Beginning in 2012, the Indian government modified its liquefied petroleum
gas subsidy programme (LPG).
  Morocco's government began indexing petroleum prices in 2013 and then
gradually liberalised most energy goods.
 High oil prices and budgetary constraints, on the other hand, prompted the
Arab Republic of Egypt, Morocco, and Tunisia, among other MENA nations,
to modify energy price restrictions and subsidies between 2010 and 2014.
 Comprehensive fuel and power pricing changes in Egypt in July 2014 resulted
in large increases in gasoline, natural gas, diesel, and electricity prices,
contributing to a spike in headline inflation.
 A number of low- and middle-income countries (EMDEs) took advantage of
the significant drop in oil prices between 2014 and 2016 to cut petroleum
subsidies.
 In Ukraine in 2015-16, the government increased the price of natural gas,
which had been extensively subsidised for decades.
 By reducing the budgetary burden of petroleum subsidies, Morocco was able
to keep poverty and inequality from worsening significantly.
 On the other hand, Egypt reformed slowly, notably for items like liquefied
petroleum gas (LPG), which are prohibitively expensive for the poor.

Some of the measures were estimated to have lowered inequality and/or poverty rates. The
reforms also led to an increase in the ease of doing business.

3. Section 3: Challenges of price controls

 Setting a price cap might reduce profit margins for producers and deter
domestic investment and entrepreneurship.
 If margins are dependent on subsidies to local enterprises to make up for
price restrictions, they might deter international investment by raising the
risk premium that global corporations face in such industries.
 Price-support regulations, on the other hand, have the potential to reduce
competition and keep producer margins high.
 The allocation of resources may be skewed towards the subsidised sector if
there is a price control system in place.
 They might result in the wasteful use of subsidised inputs.
 Controls on pricing that skew demand in favour of price-controlled items can
lead to chronic shortages of certain goods, the emergence of parallel
markets with higher prices, and the replacement of higher-quality
alternatives.
  Producers of price-controlled products may also migrate to underground
markets, which have high transaction costs and little to no regulatory
oversight.
 The use of price restrictions and substantial subsidies to redistribute income
within a country is ineffective.

 It is possible that the implementation of price restrictions will necessitate

additional rules in order to keep consumption and output in check, whether
they are explicit or implicit.
 They also complicate monetary policy implementation.
 Price restrictions frequently have a negative impact on growth and
development, impose fiscal costs, and reduce the efficacy of monetary
policy.

4. Section 4: Advantages and disadvantages of price controls

Advantages:
 This has the advantage of lowering customer costs.
 This may be critical if the provider has a monopoly that allows it to take
advantage of the public. A landlord, for example, who owns all of the
properties in a neighbourhood, might charge exorbitant rents. Maximum
prices are a strategy for bringing prices closer to a 'fair' and 'competitive
equilibrium.
 Food and rent are two examples of products for which maximum prices are
reserved.

Disadvantages:
 The drawback is that it will result in less supply. A decrease in the price of
the product may reduce the supply of the good, resulting in a decrease in
the number of properties on the market.
 A maximum price will also lead to a scarcity - where demand exceeds
supply, leading to waiting lines. It's possible that this will increase the
number of people who are homeless.
 A maximum price can lead to the formation of black markets as consumers
try to overcome the shortage of the product and pay far more than the
market price.
5. Section 5: Examples of price controls for India

For almost two decades, India has had a price cap policy in effect, resulting in among
of the world's lowest medicine prices. Healthcare spending by individuals is still high
(61%), and many Indians continue to be denied access to life-saving medications.
Indian consumers pay more than those in wealthy nations relative to their per capita
income. As a result, India's healthcare system continues to face accessibility and
affordability issues.
Drug Price Control was India's first price control measure, put in place by the
government in 2013. This ruling granted local regulatory agencies and the
Pharmaceutical Pricing Authority the power to establish the maximum price for
medications on the National List of Essentials.
In terms of pricing restrictions, rent management is an example to consider (where
governments impose a maximum amount of rent that a property owner can charge
and the limit by how much rent can be increased each year)
NPPA hiked the pricing of medications subject to price regulation for the first time in
December 2019, according to The Indian Express. It raised the prices by 50% of 21
medicines that were essential to public health initiatives at the time. There were a
number of different medicines that were employed as a first-line treatment for a
variety of diseases, including the TB vaccine BCG, vitamin C, antibiotics, chloroquine
for malaria, and dapsone for leprosy.
A few pharmaceutical firms have also asked for the right to mark up the pricing of
other vital medicines like paracetamol.

Recent governmental retaliation against Uber, Lyft, and other ride-sharing services
has rekindled the continuing discussion in India, Uber's second-largest market in
terms of cities where it operates, over regulatory policy. Most notably, the Indian
government recently passed laws allowing large cities to unilaterally impose
restrictions on how much ride-sharing services like Uber may charge passengers
during peak periods.

Due to the fact that surge pricing frequently results in rates that are higher than the
new price limitations imposed by the Indian government, there is now the possibility
of a shortage of rides during times of peak demand. Surge pricing opponents in India,
on the other hand, contend that setting a price cap on fares helps keep cab drivers'
rates competitive.