IME

Price control outside bounds

Автор: Veliko Dimitrov / 11.12.2008

According to data published by the Agency for economic analysis and forecasting (AEAF)[1], the share of the controlled prices within the economy has fallen from 21.3% in 2006 to 17.4% for 2007 (for comparison during 1991 and 1992 this parameter is 14%, respectively 13.4%, while in 1996 it is 52.4%). The questions in this case are two - is this too much or too little and whether here are included all prices over which under one or another form the government has direct effect (if we talk about indirect influence than we have to include all prices).

About the first question, it is logical that there could not be a percentage value which applies to all economies and it could not be calculated regardless of the approach used - in general, weighted or not weighted with respect to some parameter since the structure of consumption and the respective prices could vary significantly from economy to economy (for example: the countries with colder climate use more heating or energy, but these are sectors which prices are traditionally regulated). Hence, let us pay some attention to the basic views on the subject. According to the predominant opinion in the economic theory, the price control with respect to private companies is justified only in cases where we have a natural monopoly or a market which could be served best only when there is only one company - railroad, gas-, water- and electric distribution networks and the like; the justification is that they require very high initial costs, respectively "natural" difficulty for new participants to enter the market and potential ineffectiveness if the participants are more than one (this point is arguable, particularly if you look at very long investment period).  Other economists[2] think that the category "natural monopoly" in principle does not exist and price controls could never be justified. Naturally, there are people who think that the greater the control everything would be better (by everything they probably have in mind their personal wealth, while under price control, probably only those which they think that should be higher or lower).

If as an initial point, we reject the third point of view as it is not scientific and the second, since it is not commonly accepted (which does not mean that the generally accepted is accurate in this case), than the conclusion for Bulgaria is simple: the control over the prices is greater than what is considered justifiable by most economists. One way or another, prices are determined in many sectors besides the above mentioned, as a proof see the Bill on tobacco and tobacco products, as well as many other documents.

With respect to the second question, we have to say, that what is understood when we say price control in the narrow sense - administrative body which directly defines some price - is far away from real control, since here are not included many other mechanisms for intervention in the pricing policy of the private organizations. Some of these are:

  • Setting price limits (upper and lower);
  • Requirement for co-ordination with a specific government body;
  • Calculation according to a formula which is defined administratively;
  • Observing in advance signed mandatory requirements for price calculation;
  • State guarantees, preferences, subsidies bound with a requirement to follow a specific price policy.

 

In order to avoid crises, the private sector should be able to freely define its prices.  

The main reason that price control should not be used is the fact that the prices and price interrelations at every moment reflect the customer preferences, on this basis the decisions, which are made by the investors/companies, as well as the current and future state of the existing technologies and natural resources. Since all categories mentioned above are dynamic (changes in demand, moving investments from one sector to another, changes of marketing policies of the companies, development of new technology or technological solutions, faster depletion of the natural resources or discovery of new deposits) than the prices and price interrelations must change in the corresponding way, in order to reflect freely the changes in the environment. This is extremely important, since exactly the price interrelations provide information to all users and companies about what is happening in the economy. In this sense, every form of administrative control over price formation, delays the communication of the change and leads to the so called market distortions and distortion of the stimuli and as a consequence making of erroneous economic decisions[3]. From another point of view, if we assume, that the influence of the central banks (through the price of credit) on the decisions of the private banks is a form of intervention in their price policy, we could conclude that the current financial crisis is the proof for the need and importance to guard the free price formation.



[1] http://www.aeaf.minfin.bg/bg/analytical_series/2007/inflation_01_2007.php

[2] See for example: Thomas DiLorenzo, "The Myth of Natural Monopoly" - http://mises.org/journals/rae/pdf/RAE9_2_3.pdf

[3] For further information on the topic with examples included from the World economic history we recommend the book by Dwight R. Lee & Robert F. McNown - "Economics in Our Time", "Science Research Associates" Inc., 1983; solved

For more information about significant examples of price controls, mainly form fare back, see. Thomas DiLorenzo, "Four Thousand Years of Price Control", Ludwig von Mises Institute - http://mises.org/story/1962