PRICE CONTROLS IN COMPETITIVE MARKET

As I am discussing the price controls in completive markets so initially we must know that what is price control?

PRICE CONTROL:
Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternately, to insure an income for providers of certain goods. There are two primary forms of price control:

PRICE CEILING:
The maximum price that can be charged.

PRICE FLOORING:
The minimum price that can be charged.

Historically, price controls have often been imposed as part of a larger incomes policy package also employing wage controls and other regulatory elements. Price controls have also been used in modern times economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided.

PRICE CONTROL WITH REFERECE TO COMPETIVE MARKET

A competitive market is one in which the buyers and sellers have no control over prices; they are price takers rather than price makers. Such markets are described by supply and demand curves and the market equilibrium is established at a price at which the quantity demanded is equal to the quantity supplied. When the government sets a price ceiling for a competitive market there are several inevitable immediate consequences. Governments have been trying to set maximum or minimum prices since ancient times. The price control has always remained a complex phenomenon both in developed. And developing

economies. Chronic shortages and surpluses can be avoided by following this rule as demand and prices direct production. The economic consequence of government price control is economic disruption and price control is a form of public theft too. But the countries, which advocate that market mechanism should determine the prices by itself, have well documented economic systems. The consumers are well educated and understand their rights; strong consumer's associations are there to protect their rights both with respect to quality and the price of goods. Competition among businesses benefits consumers and producers but when choices are limited then liberalization leads to monopolies and lower prices are denied. Consumers International, the global federation of consumer's associations, undertook a study of competition in seven developing countries including Pakistan the problem of resources was cited as a major factor in the failure of competition regimes to act effectively. Another major issue identified was the lack of strong consumer protection legislation. Good consumer policy not only helps the consumers but also benefit companies. Without strong consumer policy, active participation of civil society groups and without ample political will to put competition regimes in place and support their work, consumers will suffer. Consumerism is a social movement for defending the rights of consumers. Consumer associations are non-profit civil entities, which are not subject to pressure groups. They work for their associates and provide services of informing advising and legal defense both on an individual and group basis and also conduct specialized publications and studies. Internationally, consumer organizations play vital role to ensure community protection that set basic standards such as for the safety of products like electrical appliances. In Pakistan, at present there is no control over the high prices being charged by the traders and manufacturers with respect to the purchasing power of the poor sections of the society. The prices of goods of common use and edible items like, oil and ghee, sugar, various drinks, toiletries, garments, pharmaceuticals, washing machines, refrigerators and motorcycles etc need to be scrutinize and controlled. On the other hand the raw materials such as PET resin, caustic soda, formic acid, soda ash, PVC are overpriced due to the higher tariff protection and other reasons. Over the last couple of years the government has considerably reduced the customs duty on imported raw materials and also most of the raw material is being imported from China at highly competitive prices no reduction in the domestic prices has been witnessed nor have the benefits of the reduction in the import duties been passed on to the consumers. United Nations also provides guidelines for comprehensive legislation and considerable implementation institutions as an international commitment to consumer rights. The most

important of these are the right to be able to access the means to meet basic needs and protection of the economic interests of the consumers. It is also advised to maintain policies to ensure the efficient distribution of goods and services to consumers particularly where the distribution is endangered like in distant rural areas. The Consumer Association of Pakistan (CAP) which is working in this field, conducted detailed studies with some recommendations to the government to control the price hike. A new authority is also demanded to prescribe normal rate of profit through a check and balance system as reduction in cost inputs due to reduction in import prices must trickledown to the consumers. Though consumer associations are not a pressure group but the progress of developed countries witnesses that governments always appreciated the participation of the non-governmental sector for legislation, implementation and education to achieve sustainable economy. Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. In Pakistan, Federal Bureau of Statistics maintains and releases rates periodically. CPI is generally considered as the main indicator of inflation. According to the data released by the Federal Bureau of Statistics, CPI rose 0.78 per cent in May, following a 0.96 per cent increase in April. Media of developed countries regularly monitors these figures for the sake of their consumers. This rise was estimated the highest rise in the last three years and was regarded as a burden on the pockets of the consumers in a country where employment opportunities and social security is assured. The developing countries like Pakistan, where the consumers are already deprived of basic necessities of life due to over profiting and mismanagement, no effective hue and cry can be witnessed in media and corridors of power, based upon these indices, and no meaningful efforts are being employed to control the prices. If the price hikes are due to over profiting then, which governmental departments are responsible for that matter Over profiting in some of the groceries is obvious, where middleman and stockiest play both with growers and consumers. In Pakistan, determination of prices cannot be left alone on market mechanism based on the rule of demand and supply until minimum per capita income, implementation of monopoly control regulations and healthy competitive environment is ensured.

IN THE NUT SHELL

Price controls are usually justified as a way to help consumers, but those who advocate them often ignore their incentive effects. Consider, for example, rent controls, a popular form of a price ceiling. If the demand curve and the short-run supply curves are inelastic, then a sizable

drop in rents may result in a very small shortage. The benefits to consumers (lower prices) will, in the judgment of most, clearly outweigh the costs to consumers (less housing). Further, the short-run supply of housing should be quite inelastic because apartment buildings take time to build and even longer to wear out. However, incentives matter a great deal in the long run. Effective rent controls discourage the construction of new buildings and encourage the retirement of old buildings. Apartment buildings wear out faster when they are not properly maintained, and if an owner cannot pass on the cost of improvements, his incentive to maintain the building is lessened. With time, sellers will approach a long-run supply curve that is much flatter than the short-run curve, and the small initial shortage may become quite large. Rationing will be on a first-come, first-served basis, and under-the-table payments will be encouraged. Even if the long-run costs to consumers outweigh the benefits, the program may remain politically popular because those who benefit by living in rent controlled apartments can vote, whereas those harmed cannot vote since the shortage of housing forces them to live in other political jurisdictions.