rationing prices and government control.pptx

rationing prices and government control

1. RATIONING PRICES AND GOVERNMENT SET PRICING

2. What Is Rationing? Rationing is the practice of controlling the distribution of a good or service in order to cope with  scarcity . KEY TAKEAWAYS Rationing is the limiting of goods or services that are in high demand and short supply. It is often undertaken by governments as a way of mitigating the impact of scarcity and dealing with economic challenges. Rationing risks generating black markets and unethical practices as people try to circumvent the austerity mandated by a ration.

3. Special Considerations Classical economic theory  suggests that when demand exceeds supply, prices rise, and high prices, in turn, curtail  demand  and encourage new entrants to the market, increasing supply and bringing prices back down to reasonable levels. If the reality were this simple, rationing would be both counterproductive—because it creates shortages—and unnecessary, since the market will act to re-stabilize itself. The problem is that for some goods and services—food, fuel, and medical care—demand is  inelastic ; that is, it does not fall in proportion to increases in price. Moreover, the entry of new suppliers to rebalance markets may not be possible if the shortage is the result of a crop failure, war, natural disaster, siege, or  embargo . While not ideal, rationing is often undertaken by governments that would otherwise be facing an even bigger economic crisis.

4. Rationing to Combat Shortages Many  capitalist  economies have temporarily resorted to rationing in order to cope with wartime or disaster-related shortages: the U.S. and Britain issued ration books during World War II, for example, limiting the quantities of tires, gasoline, sugar, meat, butter, and other goods that could be purchased. In  communist  countries, by contrast, rationing was in many cases a permanent or semi-permanent feature of daily life. A 2019 economic crisis led Cuba give every Cuban a ration book entitling an individual to small amounts of rice, beans, eggs, sugar, coffee, and cooking oil for the equivalent of a few cents in the United States. Since that is not enough to survive, Cubans must purchase additional supplies on the open market, where the prices are significantly higher. Additionally, there are limits on the number of higher-quality items Cubans can purchase on the open market, such as chicken.3

5. Risks of Rationing Rationing provides governments with a way to constrain demand, regulate supply, and cap prices, but it does not totally neutralize the laws of supply and demand.  Black markets  often spring up when rationing is in effect. These allow people to trade rationed goods they may not want for ones they do. Black markets also allow people to sell goods and services for prices that are more in line with demand, undermining the intent of rationing and price controls, but sometimes alleviating shortages. What Are Price Controls? Price controls are the legal minimum or maximum prices set for specified goods. Price controls are normally mandated by the government in the  free market . They are usually implemented as a means of direct economic intervention to manage the affordability of certain goods and services, including rent, gasoline, and food. Although they may make certain goods and services more affordable, price controls can also lead to  disruptions  in the market, losses for producers, and a noticeable change in quality.

6. KEY TAKEAWAYS Price controls are government-mandated minimum or maximum prices set for specific goods and services. Price controls are put in place to manage the affordability of goods and services on the market. Minimums are called price floors while maximums are called price ceilings. These controls are only effective on an extremely short-term basis. Over the long term, price controls can lead to problems such as shortages, rationing, inferior product quality, and illegal markets.

7. Understanding Price Controls Price controls are a form of government-mandated economic intervention. They are intended to make important purchases more affordable for consumers and are also commonly used to help steer the  economy  in a certain direction. For instance, these restrictions may be deemed necessary in order to curb  inflation . Price controls are the opposite of prices set by market forces, which are determined by producers because of supply and demand.1 Price controls are commonly imposed on  consumer staples . These are essential items, such as food, rent, gasoline, or electricity. Controls set by the government may impose minimums or maximums. Price caps are referred to as  price ceilings  while minimum prices are called  price floors . Price controls are often implemented to increase affordability and promote economic stability. However, they may have the opposite effect. Over the long term, price controls have been known to lead to problems such as: Shortages  and/or  rationing Illegal markets  to supply price-controlled goods through unofficial channels Deteriorating quality as producers try to increase profits or cap losses1

8. History of Price Controls Price controls aren't a new concept. According to historians, the production and  distribution  of grain were regulated by Egyptian authorities in the third century B.C. Other civilizations implemented price controls, including the Babylonians, the ancient Greeks, and the Roman Empire. More recent instances of price controls frequently occur during times of war and revolution. During the immediate aftermath of the EDSA revolution prices of basic commodities such as rice, sugar, eggs were temporarily implemented until a civil government was formed and started the long process of economic recovery. A recovery which took about 14 years to regain to 1983 level of economic strength. Governments continue to intervene and set limits on how producers can price their products and services. For instance, municipal governments often limit how much rent a  landlord  can collect from  tenants  and the amount by which they can increase these rents each year. These price controls are intended to make housing more affordable. Types of Price Controls Price controls come in two forms: price floors and price ceilings. Price floors are the minimum prices set for goods and services. They may be set by the government or, in some cases, by producers themselves. Once these are set, prices can't fall below the minimum.

9. Price ceilings or caps are the highest points at which goods and services can be sold. These are often used when governments want to help consumers because: Inflation has risen sharply. There is an economic crisis. Corporations or large producers may be practicing price gouging. Market prices generally risk becoming unaffordable for most of the population. Minimum prices are imposed to help producers when authorities believe that prices are too low, leading to an  unfair market . This can happen when, for example, large corporations lower prices to unsustainable levels. The large corporation can absorb the losses more easily than smaller companies, which are driven out of business. Example of Price Controls Rent Rent control is one of the most common forms of price control. Government programs establish limits on the maximum amount of rent a property owner can collect from their tenants. These limits are also imposed on annual rent increases. The rationale behind rent control is that it helps keep  housing affordable , especially for more vulnerable people like those with lower  incomes  and aging adults.5 Medicine Governments commonly impose controls on  drug prices . This is especially true for life-saving and specialty medications like insulin. Drug companies often come under pressure for setting prices too high. Their rationale is normally patent protection and to cover the expensive costs of  research and development  (R&D) and distribution. Consumers and governments say this puts certain medications out of reach for the average citizen.

10. Advantages Price controls can keep vital goods and services affordable for consumers in times of turmoil. For instance, price ceilings are established to prevent producers from  price gouging . This is common in the housing/rental industry and the drug/health  sector .2  It can also protect consumers during financial crises or after natural disasters. Disadvantages When prices are established by market forces, they generally shift to maintain the balance between  supply and demand . Government-imposed price controls can lead to the creation of excess demand in the case of price ceilings. This can lead to shortages or illegal markets for goods that aren't otherwise available. Price floors can lead to excess supply, which can create waste in the production chain and cut into producers' profits if goods are unable to be sold.