Social Impact of Binding Price Ceiling, Inflation, Pricing and Quantity RL- CXXIV, MMXI Vol. XI No. VIII

School of Graduate Studies

College of Business & Economics, AAU

Lecture Notes RL- CXXIV, MMXI Vol. XI No. VIII

Costantinos Berhutesfa Costantinos, PhD,

Professor of Public Policy, School of Graduate Studies,

College of Business & Economics, AAU,

Policy and Institutional Reforms (MPMP 606)

Sustainable Development Management (MPMP 609)

Social Impact of Binding Price Ceiling, Inflation, Pricing and Quantity

Abstract

Ethiopia’s government faces the usual panoply of challenges endemic in developing countries with too few instruments and too few resources, while also grappling with the perennial problem of managing development, namely sequencing of policy reforms, all subject to the political constraints of containing the disruptive impacts of policy reforms to acceptable levels, a particularly important problem for Ethiopia given the very narrow margins for manoeuvre imposed by fiscal and external deficits, subsistence levels of household income for much of the population and a complex regional weave in its social fabric.  Getting the priorities right and managing change are thus particularly vital issues for public policy and management professionals. The Government had announced several price ceilings on various commodities recently. It asserts that imposing price ceilings would protect consumers from conditions that could make basic commodities beyond your reach. Our ability to predict what will happen when governments try to control supply and demand shows the power and usefulness of supply and demand analysis itself. However, a price ceiling can cause problems if imposed for a long period without controlled rationing and can produce damaging results when the correct solution would have been to stimulate and encourage the private sector to increase supply.

Misuse occurs when a government misdiagnoses a price as too high when the real problem is that the supply is too low. In a nation where rural economic statistics are scanty, one wonders how price ceilings can be set above or below the free-market equilibrium price. Because for a price ceiling to be effective, it must differ from the free market price as a non-binding price ceiling, where the ceiling has no practical effect; or a binding price ceiling, where the price ceiling has a quantifiable shock on the market. While it is difficult to kill inflation with only one shot, short-term measures, such as price freeze, are important if inflation becomes a scourge on the economy. Nonetheless, in most cases, lower costs mean lower quality. Price caps are famous for the incentive they provide for illegal activities, specifically the emergence of black markets. In addition, if there is a shortage, sellers may discriminate among customers except during crises, price controls except are damaging to the economy, where the negative impact of price capping would outweigh the positive effects. The Recommendations hence focus on four arenas: measures to manage inflation, increasing supply, corporate discipline, and social responsibility of the trading sector and macro policy and strategic reforms required to secure the demand and supply equilibrium.

See lecture here or  https://www.academia.edu/31502958/Social_Impact_of_a_Binding_Price_Ceiling_Inflation_Pricing_and_Quantity_-lecture_RL-_CXXIV_MMXI_Vol._XI_No._VIII