Price fixing by governments does more harm than good

In a little over a month-long nationwide lockdown, multiple cases of price gouging have been reported in the media. Small retailers are being penalized for hiking up the price of goods such as lentils, meat products from as little as NRs 10 up to NRs 50 per unit. With increasing complaints from the public, many local governments have taken price-fixing measures. These measures may assure the public that they will not be swindled by retailers. However, there is more than meets the eye here.Price fixing, no matter how one sees it, does not solve the root cause of price hikes.

The primary cause of the price hike is not a moral failing on part of sellers, but the result of the lockdown that has disrupted the normal supply chain. When demand exceeds supply, the economy naturally makes necessary adjustments to ensure that the limited goods and services are allocated optimally under the new circumstances. This adjustment is communicated to the players in the market in the form of high price levels. This same theory works the other way round as well, as evidenced by the historical negative price of crude oil that the world witnessed last week.

With factories being shut, productions coming to a halt, and agro produce failing to reach markets, the supply of goods has shrunk considerably while demand has stayed put (more or less). Hence, higher prices for goods in the market. An important thing to consider at this time of global pandemic then is, does price-fixing respond at all, to any of those underlying causes?

On one hand, price-fixing even under normal circumstances has unintended consequences. As the government sets the prices of goods, retailers could be discouraged to source and sell goods that cost them higher than the set price. Even producers then have no incentive to innovate new production techniques that make the goods available at lower costs. This will only create a shortage of goods that could have been easily available had the sellers had the choice to sell at a price on par with their cost.

On the other hand, there is a larger political force at play here, and it does not necessarily leave the consumers better off at the end of the bargain. Given the pandemic, there is a higher incentive for politicians to pull off moves that secure their position as a local hero, thus cementing a solid constituency. Price fixing serves to do just that for that in the short term. But it does not do just that. It also sets precedents for the future.

During this period of economic halt, slight fluctuations in prices are to be expected. Such fluctuations eventually become stable as the economy returns to normal. But what stays longer is the effect of the government’s heavy-handed policy actions on small retailers.

Bidhyalaxmi Maharjan

Bidhyalaxmi Maharjan

Bidhyalaxmi is working as Research & Communications Assistant at Samriddhi Foundation. She is a Master of Arts student at Madan Bhandari Memorial College.