Price Control SS2 Economics Lesson Note

PRICE CONTROL POLICY: This is defined as a process by which the government or its agency fixes the price of essential commodities. That is, it is a situation where the government uses the instrument of law to fix the price of certain commodities.  It can be in the form of maximum or minimum price control. In Nigeria, price regulation or control on essential commodities is being carried out by the Price Control Board.

OBJECTIVES OF PRICE CONTROL POLICY

1. To prevent exploitation of consumers by producers.
2. To avoid or control inflation.
3. To help low-income earners, e.g. minimum wage earners.
4. To control the profits of companies, especially monopolists.
5. To prevent fluctuation of prices of some goods, eg agricultural products.
6. To stabilize the income of some producers, e.g. farmers.
7. To make possible planning for future output.

TYPES OF PRICE CONTROL POLICY

Minimum Price Control Policy: is the lowest price by law, at which goods and services (labour and agricultural products) can be bought. Buyers are allowed to offer a higher but not a lower price. The main purpose is to allow workers a certain level of income, especially during inflation and to protect agricultural producers against a fall in income due to bumper harvest.

A minimum price is usually above the equilibrium price and thus supply tends to be greater than demand, leading to excess supply and thus surplus, that is an increase in unemployment in the case of labour. It also leads to the Black market in which people offer themselves for employment at a wage below the minimum price.                                                                

2. Maximum Price Control Policy: is the highest price by law, at which goods and services can be sold. Sellers can sell at prices below it but not above it. The aim is to protect consumers, in general, and the poor community, in particular, especially during a period of rising prices.

A maximum price is usually below the equilibrium market price. Whereas this is agreeable to consumers, suppliers find it highly unsatisfactory. Therefore, demand for the commodity tends to be greater than the supply of it. This leads to excess demand and thus shortage of the commodity in the market. It also leads to a Black market in which sales are made secretly, at higher prices to those who can afford it and, at a fixed price, to relatives and friends. Also, there will be rationing in which consumers are allowed specified quantities at regulated periods.

EFFECTS OF PRICE CONTROL POLICY

1. Hoarding of goods
2.  Stimulation of demand i.e. excess demand, which cannot be satisfied.
3. Shortages of goods in the market
4. Queues for the good concerned
5. Black market dealing/under-counter sales
6. Reduction in supply
7. Rationing of the good
8. Favouritism, bribery and corruption