PRICE CONTROLS When the market is experiencing a surplus, there is a possibility that producers will lose. Conversely, when the market is encountering shortage, there is likelihood that consumers will be abused. What happens if disequilibrium (either due to surplus or shortage) in the market persists at longer period of time? If this happens, the government may intervene by imposing price controls. Price control is the specification by the government of minimum or maximum prices for certain goods and services when the government considers it disadvantageous to the producer or consumer. The price may be fixed at a level below the market equilibrium price, or above it depending on the objective in mind. In the former case, for instance, the government may wish to keep the price of some goods (e.g, basic food) down as a means of assisting poor consumers. In the latter case, the aim may be to ensure that producers receive an adequate return (price support to farmers, for instance). Largely, price controls may be applied across a wide range of goods and services as part of prices and incomes policy aimed at combating inflation. Price controls are classified into two types: floor price and ci ig price. Chapter 2.@ 43Mosceconomcs FLOOR PRICE ‘A floor price is the legal minimum price imposed by the government on certain and services, A price at or above the price floor is legal; price below itis not. The setting" a floor price is undertaken by government ifa surplus in the economy persists, For insta the government may impose a minimum price on producers’ commodities say at Pyo.os, shown in Figure a0, This policy is usually resorted to in order to prevent bigger losses the part of the producers (e.g, farmers). Floor price is a form of assistance to Producers py the government for them to survive in their business. Floor prices are mainly imposed by iy government on agricultural products especially when there is bumper harvest or the laby market by imposing minimum wages. Ficure 2.n: Floor price The figure shows the equilibrium ‘between quantity demanded and quantity supplied at P30.00 and 150 units of goods If government imposes @ floor price of P40.00, uantiy demanded decreases t0 100 uns while quantity supplied increases to 200 units resulting in a shortage of 100 units. In the long-run, a floor price will erate surplus of gods in the market Observe in the figure that if the government imposes a price floor of, say, P4000 producers will sell 200 units of goods but consumers will purchase only 100 units of thost goods. Ultimately it results to a surplus of 100 units. In the fong run, therefore, a floor pice ‘creates an excess supply of goods since producers are enticed to produce more becaust of the higher price but consumers are restrained from purchase more of the good. A lox price, in the long run, therefore distorts resource allocation and makes the product mort expensive since a floor price is imposed above the equilibrium price. Moreover, it makes taxes higher in the long run since government has to finance its purchases of the surpit# product from the taxes collected from taxpayers. PRICE CEILING A ceiling price is the legal maximum price imposed by the government. A price celté is usually below the equilibrium price, for example at P20.00 as shown in Figure 2"! ‘most cases, a price ceiling is utilized by the government if there is a persistent short38* goods (eg, basic commodities lke food items and oil products) in the economy. As s¥°* the prices of goods affected by a shortage do not increase persistently. Because ofthis 44% Chapter 2 4Tre Base Auras oF Dewan ao Surrty government regularly monitors the market and imposes a maximum price on commodities, which is to be strictly followed by producers and sellers. A price ceiling therefore is imposed by government to protect consumers from abusive producers or sellers who take advantage of the situation. This is usually done by government after the occurrence of a calamity like typhoon or severe flooding. ‘Take note however that in the long run, a ceiling price imposed by government results to shortage of goods in the market. Why? Because at lower price producers do not have enough incentive to produce more while consumers are encouraged to purchase more of those goods. We can again illustrate this in a graph. For instance, in Figure 2.12 when the ceiling price is set by the government at P20.00 producers are only willing to sell 100 units while consumers are enticed to buy more at 200 units. Consequently, a shortage of 100 units occurs in the market. Now, if government will continue to impose the price ceiling, in the Jong run, it will create greater shortage of the good in the market. As the situation worsens, producers will now take advantage of the consumers by selling their products at higher prices in the illegal markets (known as black markets). At this point, consumers have no ‘option but to buy the good at price higher than the ceiling set by the government. Why can the producers increase their price (although illegally)? Because as more consumers demand for the product, they will battle it out among each other in buying the limited supply of goods available in the market brought about by the shortage making the price go up. In other words, as the shortage of goods worsens in the long run, more producers will sell their products at higher prices in the illegal market. Figure 2.12: Ceiling price The figure shows the equilibrium between quantity demanded and quantity supplied at P30.00 and 150 units of ‘goods. If government imposes a ceiling price of P20.00, quantity demanded increases to 200 units while quantity supplied decreases to 100 units resulting in a shortage of 100 units. In the long run, a celling price will create shortage of goods in the market. Can you think of concrete examples of price ceilings and floor prices imposed by Bovernment? What do you think are the reasons the government imposes such price controls? Chapter 2 45