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What is the Administered Price?
Administered price is the price of goods or services that is set directly by a government or centralized authority rather than being determined by market forces. They are not the result of conventional supply and demand dynamics of a competitive market but are actively controlled to achieve a certain economic or policy objective.
To illustrate this, consider the following scenario:
- A government agency decides to set the price for a basic staple like bread.
- The agency sets this price below the market equilibrium to make it affordable for all citizens.
This is an instance of an administered price as market prices are not determined by market forces but price controls are done by the government.
Key Takeaways!
- Administered price is fixed by the government or centralized authority, instead of being determined by market forces.
- These are often used by governments to control economic conditions and ensure the affordability of essential commodities.
- Administered prices can greatly influence market dynamics, often leading to reduced competition.
How does Administered Pricing Work?
In essence, administered price is a form of government intervention in the market economy. They can be used to achieve various economic goals such as stabilizing prices, promoting social welfare, or preventing price gouging.
When governments set administered prices, they usually do so for essential goods and services that are considered vital for the well-being of their citizens. For instance, basic food items, healthcare services, and public utilities are often subject to administered prices.
Some of the steps involved in administered price are:
- Identification of Essential Goods or Services: The first step in setting an administered price involves the identification of goods or services that are considered necessary for the well-being of the public. These can range from basic food items to health care services or public utilities.
- Price Setting: Once the essential goods or services are identified, the government or responsible authority sets the price. This price setting is often done below the market equilibrium to make the goods or services affordable to all citizens.
- Preventing Price Gouging: By setting the price, the authorities effectively prevent price gouging. This ensures that suppliers cannot artificially inflate prices in times of scarcity or other market disruptions.
- Rent Controls: In some cases, administered prices may also come in the form of rent controls. This restricts the amount a landlord can charge for rent, making housing more affordable for tenants.
- Competition Policy: The government or responsible authority uses administered prices as a tool in their competition policy. This helps to control the market and prevent monopolies from exploiting consumers.
- Public Interest: Ultimately, the aim of administered price is to serve the public interest. By controlling the cost of essential goods and services, the government ensures that all citizens can afford to meet their basic needs.
Remember that while administered prices can help stabilize markets and make essential goods and services more affordable, they can also lead to inefficiencies and market distortions if not managed correctly.
Examples
Consider the examples of centrally planned economies such as the former Soviet Union and Cuba, where administered prices were a fundamental mechanism:
- Soviet Union: Under the centrally planned economy, the Soviet government had complete control over pricing. The government decided how resources were allocated and set prices for all goods and services. This included critical sectors like electricity, where prices were set to ensure access to all citizens regardless of their income levels.
- Cuba: Similarly, in Cuba, the government controls the prices of most goods and services. For instance, essential commodities like food and healthcare are provided at low costs or even free of charge to all citizens. This strategy is aimed at minimizing the gap between different income groups and ensuring basic necessities are within reach of everyone.
- Rent Controls in New York City: Another example of administered prices is rent control policies in cities like New York. These are set by local governments to protect tenants from exorbitant rental costs and ensure affordable housing for all. While this may seem beneficial to renters, it can also lead to a shortage of housing and neglect of property maintenance due to reduced profits for landlords.
In all such cases, the state’s role as both a buyer and seller allowed it to control prices and directly influence the market, often keeping prices artificially low to meet social objectives.
However, these policies can also discourage competition and innovation among companies, leading to economic inefficiencies over the long term. Despite these challenges, centrally administered prices continue to play a significant role in many economies around the world.
Advantages
- Predictability: Administered prices can provide a level of predictability for consumers. For example, if the price of electricity is set by the government, households can budget effectively without the fear of unexpected price hikes.
- Barrier to Monopolies: By setting the prices, the government can prevent certain companies from dominating the market through disruptive pricing, thereby fostering healthy competition.
- Affordability: When prices are administered, essential services and goods like electricity and healthcare can be made affordable or even free for all citizens, thus ensuring everyone has access to basic necessities.
- Control Over Resource Allocation: Administered pricing allows the government to control who gets what resources, ensuring fair distribution and curtailing wasteful behaviors.
- Protection of Local Businesses: By setting prices, the government can protect local industries and businesses from the fierce competition of multinational corporations, ensuring economic stability and job security for the citizens.
Challenges
- Lack of Market Competition: When prices are set by an administering body rather than the market, it can stifle competition. Companies are less motivated to innovate or seek out efficiencies when they can’t compete on price.
- Resource Misallocation: Administered prices may not accurately reflect the true costs of goods or services, potentially leading to overuse or underuse of certain resources. For instance, if electricity is priced too low, consumers may waste it, straining the supply.
- Administrative Costs: Setting and enforcing prices across a market can be an expensive and bureaucratically intensive task. These costs are often passed onto taxpayers or consumers in the form of higher prices or taxes.
- Prone to Political Influence: The price-setting process can be influenced by political considerations, leading to prices that serve political, rather than economic, ends.
- Barriers to Entry for New Businesses: When prices are artificially low, it can be difficult for new businesses to enter the market, as they may struggle to cover their costs. This reduces diversity among suppliers and can ultimately harm buyers.
Conclusion
While administered prices can offer certain protections and benefits, they also present significant challenges.
It’s crucial to strike a delicate balance, ensuring the welfare of local industries without stifling competition or causing resource misallocation.
FAQs
What is an administered price also called?
It is also known as price ceilings or price floors. A price ceiling represents the maximum price for a product.
What does administrative price mean in economics?
In Economics, administered prices set by the government will either be above or below equilibrium prices and therefore they are considered undesirable
What are the objectives of administered prices?
The primary objectives of administered prices are to control inflation, protect consumers from exorbitant costs, and preserve the stability of essential markets such as food and energy.
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