Economics (AS & A Level) · Oct / Nov 2022 · Paper 21 · Question 1

Governments and markets Prices, according to economists, are determined by supply and demand. In many times and places, however, prices have been set by governments. For example, in January 2020, the government of Argentina updated its list of maximum prices, setting guidelines for over 300 products. Consumers, via a smartphone app, can report any prices of these products that are above the maximum. The World Bank has collected data on the extent to which the governments of developing economies have intervened in markets to set prices. Table 1.1 shows the results of this research. Table 1.1: Government intervention in product markets to influence prices in developing economies Product market Percentage of governments intervening in the market to influence price Examples Energy 89 Petrol in Iran Food 76 Bread in Benin Rice in Haiti Building materials 13 Cement in Burkina Faso Source: Adapted from ‘In a fix’, The Economist, 11 January 2020 Governments generally impose price controls for one of three reasons: • to redistribute income in an economy: maximum prices help the poor afford the necessities of life, whereas minimum prices support the livelihoods of farmers • to stabilise a market: governments use stocks to smooth fluctuations in the price of a commodity like cocoa, buying when there is excess supply in the market and selling when there is excess demand • to control inflation: maximum prices have been used in many countries Many economists have been critical of the use of price controls by governments. In a market without government intervention, a product’s price acts as a signal of its scarcity and an incentive to overcome scarcity. However, minimum prices can lead to food rotting in warehouses while maximum prices can lead to hoarding and black markets. Another reason not to impose price controls in an economy is that they can be very unpopular. For example, in Santiago, the capital city of Chile, an increase in the minimum price on the public transport system led to widespread unrest in 2019. In the same year, the government of Iran decided to raise the minimum price of fuel sharply and suddenly, leading to a great deal of protest. A representative of the World Bank has stated that one reason not to impose price controls in an economy is that they can be hard to remove, expressing the view that ‘it is better not to have them in the first place.’ Source: Adapted from ‘In a fix’, The Economist, 11 January 2020

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