Command Pricing
Command pricing or price control refers to the minimum and maximum price that the law sets for goods. The price control process is usually done by the government and in the free market. The reason for this is the direct economic intervention in order to manage the affordable conditions of some goods and services such as rent, cars, food, etc.
Controlling prices in the market in the short term makes it possible for the price of some goods and services to be affordable. But this trend may cause disruption in the market in the long term and impose losses on the producers.
Application of Command Pricing
The economic intervention of the government in this regard is done with the aim of making goods and services affordable for the final consumers. In addition, this policy is used in order to guide the macro economy in a certain direction. For example, we can mention the creation of some price limits to curb inflation. The command pricing process is a separate process from primary pricing that is done by manufacturers and suppliers based on supply and demand. The application of this policy is on the main goods that are more sensitive for the consumer in the society.
Price Control Policies can Work in Two Ways
1. Applying the exact price of goods and services and making it mandatory
2. Determine the minimum and maximum price and order that price fluctuations take place within this range.
Despite the justifications governments give for mandated pricing, such as affordability or economic stability, this process may involve counterproductive effects and results. For example, in the long term, this process may include problems such as shortages, rationing, reduction of product quality, and the formation of illegal markets.
Concrete Examples of Command Pricing
1. In the field of Rent
One of the main and most common methods of exerting force and pressure on prices is price control in the field of rent. In this way, the government imposes restrictions on the maximum amount that the owner of a property can receive from his/her tenants. In addition, we have the application of these restrictions in relation to the increase of the annual rent. The reason for this in relation to the rent is that housing prices remain affordable, especially for people with low incomes or the elderly.
2. In the field of Medicine
There is always monitoring of drug prices, especially vital and specific drugs such as insulin. Due to the pressure that most of the active companies in the field of medicine bear due to high prices, they protest against the implementation of control supervision in this field. On the other hand, the non-application of control policies has made access to some medicines a crisis for ordinary citizens. Therefore, we are always faced with the process of price control on vital drugs.
3. Minimum Wage
The minimum wage guarantees a certain standard of living. The meaning of minimum wage is the lowest salary that the government obliges the employer to pay to the employee.
Advantages of Command Pricing
As stated, the application of the price control process is related to the time when governments feel the inability to purchase goods and services by consumers. Therefore, to prevent the upward trend of prices, they set a certain price ceiling for producers.
But these policies in some cases benefit the producers. In fact, if governments come to the conclusion that the pricing process is such that producers do not benefit from it, they will take control policies in their favor. In this way, price restrictions are applied in such a way that companies reach profitability. This performance and the economic interventions of the governments allow companies to remain in the competitive market.
On the other hand, the process of price control and mandatory pricing also avoids monopolization by companies. When a company is in a competitive advantage over other peers and its demand is greater than supply, producers have the right to set the desired price. Therefore, it is possible that they increase their prices in order to gain the most profit. At this time, governments can allow new competitors to enter and operate in the data market to increase unreasonable prices by producers and prevent monopoly. They can also ensure the economic well-being of consumers by setting price ceilings.
Disadvantages of Command Pricing
Although the application of price control policies is usually applied with a good and constructive purpose and intention, in economics, it sometimes includes the opposite result. Efforts based on supply and demand may suffer for a certain period of time.
When we are faced with a sharp drop in prices, producers will try to find a way to escape this situation due to their low income. The result of this situation will be either a decrease in production or the production and supply of low quality products. In such a situation, the opportunity for development and innovation is also denied from the producers, and due to the lack of supply of new products, the competitiveness of the producer is also reduced.
Up To Sum
Command pricing, which is a tool to monitor and control prices, despite its suppressive purpose for inflation, sometimes has the opposite result. Applying price control policies can balance supply and demand to a great extent. As a result, it will lead to many problems, including production reduction, creation of black market, reduction of investment opportunities, etc. Instead of correcting the main roots of this problem, such as incorrect monetary and currency policies, economic policymakers have focused all their attention on prices at the retail level. As a result of this, we are witnessing the instability of the inflation rate and the gradual increase in prices.
