ECO 415

Assignment

Using appropriate diagram, explain and give examples of price controls from government

FAKHRULRAZI BIN IBRAHIM 2011707395

Bachelor of Science (Hons) Business Computing Faculty of Computer and Mathematical Sciences

How is the government going to control prices?

The government will take stern measures to ensure that the businesses do not take advantage of the GST implementation to increase prices of goods to make excessive profits. Measures to be taken by the government include introducing the Anti-Profiteering Act, intensifying enforcement action through the National Pricing Council, distribution of Shoppers Guide, as well as making the hypermarkets act as price setters. Heavier fines and penalties will be imposed to make sure that the businesses comply with the rules and procedures formulated. These measures are aimed at changing the profit-centered attitude and unethical practices of the businesses.

Government Intervention in the Determination of Market Price Price Control

The reason for price control is to overcome the problem of violent fluctuation in price and to stabilize the market price. If the equilibrium price is too high, the government will intervene and make the market price lower. This legal price is known as ceiling price or maximum price. If the equilibrium price is too low, the government will intervene and make the market price higher. This legal price is known as floor price or minimum price.

Price Controls Advantages and Disadvantages

Readers Question: what are the pros and cons of price control? Price controls can take the form of

Maximum Prices
Price cant rise above a certain level. This can reduce prices below the market equilibrium price. The advantage is that it may lead to lower prices for consumers. Diagram Maximum Price

The disadvantage is that it will lead to lower supply. There will also be a shortage, demand will exceed supply; this leads to waiting lists and the emergence of black markets as people try to overcome the shortage of the good and pay well above market price.

Examples
1. For example, during the Second World War, price of goods was fixed and good rationed. However, this
encouraged people to sell on the black market through inflated prices. 2. Tickets for football prices and concerts are often set at a maximum price. (e.g. if left to the market, equilibrium prices would be much higher). e.g. at current prices F.A. Cup final could sell many more tickets than 80,000.

The advantage of setting this maximum price is that it keeps football affordable for the average football supporter. It is argue if prices were set solely by market forces, it would be just the wealthy who could afford to go to games.

The disadvantage is that it means some who want to go to the game cant because there is a shortage of tickets.

3. The government may set a maximum price for renting to keep housing affordable.

This may reduce supply of housing leading to homelessness. However, it may be that landlords have monopoly power and supply is very inelastic. In this case a maximum price may make renting cheaper without reducing supply

Minimum Prices
Minimum prices are used to give producers a higher income. They are used to increase the income of farmers producing goods. For example, the EU had a Common Agricultural Policy (CAP). This increased the income of farmers by setting minimum prices.

Diagram Minimum Prices

The Disadvantage of Minimum Prices

Higher prices for consumers. We had to pay more for food Higher tariffs necessary on imports. The EU put tariffs on food to keep prices artificially high. May encourage oversupply and inefficient. The CAP encouraged farmers to produce food that no one actually wanted to eat. We had over-supply (butter mountains, wine lakes)

Conclusion
Generally price controls distort the working of the market and lead to over supply or shortage. They can exacerbate problems rather than solve them. Nevertheless there may be occasions when price controls can help for example, with highly volatile agricultural prices.

References
http://www.treasury.gov.my/index.php?option=com_content&view=article&catid=186%3Acukaibarang-dan-pekhidmatan&id=1481%3Abagaimanakah-kerajaan-akan-mengawalharga&Itemid=306&lang=en http://www.economicshelp.org/blog/621/economics/price-controls-advantages-and-disadvantages/