Controlling market price fluctuation

Regulating product prices
Restricting price variability
Controlling market price

Context

Prices play a powerful role in directing industrialization. High prices reflect scarcity; they raise profitability and attract resources for increased production. Low prices reflect abundance and keep resources away. Prices best fulfil this role in competitive markets. Market imperfections - such as monopoly or poor information - distort these signals. But governments sometimes regulate prices deliberately, either to correct such distortions or to pursue some other objective, such as the redistribution of income, the promotion of high-priority industries or the control of inflation.

Counter-claim

Many countries that have adopted price controls have found them difficult to enforce because black markets mushroom and drive large sections of the economy underground. In addition, multi-product firms, such as those in the textile industry, tend to compensate for price controls on one product by expanding production of uncontrolled products. As a result, fewer "essential goods" are produced in favor of more "non-essential goods".

As a rule, the wider the controls, the harder they are to enforce. In 1970 the Ghanaian government attempted to control 6,000 prices for 700 groups of products, yet its Prices and Incomes Board had only 400 personnel. The scale of such a task is beyond even the most competent agencies. Prices in such a system are often set by adding a fixed margin to costs. This removes any incentive for firms to reduce costs. Furthermore, controlled prices discourage new investment, so that as demand expands, shortages begin to appear. Often the poorest consumers, the supposed beneficiaries of price controls, suffer the consequences along with others.