Describe in detail the type of ‘price control’ in the above case Show the impact of this price control on quantity demanded and quantity supplied of a good (essential good) on a diagram Using diagram in part (b), show and discuss the impact of price control on consumer surplus and producer surplus (Discuss the impact using areas of consumer and producer surpluses)
Policies are designed to address issues, often with good intentions. However, the most difficult thing in designing policies is that they imply a balanced analysis of the trade-offs to avoid a worse outcome than the initial problem.
As the Covid-19 crisis continues in Malaysia, the government has imposed a maximum price control scheme on essential items, starting from April 15 until the end of the Movement Control Order (MCO) period. I believe that price control is not a good measure to reduce the upward movement of prices during a period of emergency. This is all the more true under the current scenario, where the eventual upward movement of prices is not dictated by a shortage, but is the consequence of the policy designed to contain the spread of Covid-19. In the present situation, producers are ready to meet the pressure coming from the demand if they could do so.
In order to understand my point, it is important to be clear about what prices are. “A price is a signal wrapped up in an incentive.” (Alex Tabarrok and Tyler Cowen, Modern Principles of
Under the MCO, consumers had to reshape their habits, and the biggest shift was more Malaysians eating at home, and therefore, needed to buy more food from the supermarket. This tendency was accompanied — in particular at the beginning of the so-called lockdown — with a natural tendency to hoard food, driven by the fear of a progressively deteriorating situation. The increasing demand is pushing some prices upward. The phenomenon is amplified by the supply chain disruptions created by the MCO itself — if the demand for eggs increases, pushing up prices, but the supply cannot easily adapt because, for example, some collateral products such as packaging are not available, then that upward price movement will be further exacerbated.
With price controls, the government is showing its intention to intervene to protect people’s
With new supplies entering the market, the upward tensions can be mitigated and eventually prices can go back to their original levels, or even drop if the supply grows beyond the actual demand (pushed by the initially rising prices). Such a readjustment process does not happen overnight, and neither is it perfect. It takes time and evolves in steps.
- Describe in detail the type of ‘price control’ in the above case
- Show the impact of this price control on quantity demanded and quantity supplied of a good (essential good) on a diagram
- Using diagram in part (b), show and discuss the impact of price control on
consumer surplus and producer surplus (Discuss the impact using areas of consumer and producer surpluses) - On similar diagram, show the area of welfare
losses (deadweight losses) from imposition of the price control. Do elasticities matter in determining the size of losses? Explain - Does the proposed price control result in net welfare gains?. Would you advise the authority to implement the policy?
- Based on the above news, why price control is considered as not a good measure to reduce the upward movement of prices during a period of emergency such as MCO?
- Give suggestion(s) on alternative policies that could be implemented by authority to control prices of essential items during this situation
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