PRICE MECHANISM AND CONTROL IN A VOLATILE ECONOMY: A VERITABLE TOOLS FOR STABILITY

Price control is an essential strategy for the development of effective marketing and sustainable consumption of staple commodities like rice in emerging and developing countries such as Nigeria. Price mechanisms on staple foods are often imposed to serve social and economic objectives (Murphy et al. 2019). They may be part of government efforts to protect vulnerable consumers, who constitute the vast majority in the country, by addressing market failures or subsidizing the cost of essential goods. They may be intended to maintain the incomes of producers as part of a price-support program. More importantly, price control has been widely studied in the petroleum industry, while that of food products has received less attention (Murphy et al. 2019; Shi and Sun 2017). The need for government in the present economy to take a critical look into price control of consumable food products cannot be emphasized enough due to several factors, such as volatility in the interest rate, a galloping rise in inflation, an unstable exchange rate, and an unstable economic and political atmosphere, among others.

The term “price mechanism” refers to the system where the forces of demand and supply determine the prices of commodities and changes therein (Tsakok, 2019). They asserted that it is the buyers and sellers who determine the price of a commodity. It is the outcome of market forces such as demand and supply. However, the government sometimes manipulates the price mechanism in order to make commodities more affordable to low-income consumers or to rescue producers from market lows.

Price mechanisms and controls have a long history, with well-documented examples stretching back to Revolutionary France (Morton 2001). Price controls can be imposed in a variety of ways. They may involve price ceilings, or price floors, imposed on selected goods and services by the authorities. Government price management can also occur as a result of other policies implemented in the country to provide stability to consumers and the general populace.

INSTRUMENTS OF PRICE CONTROL

According to Guenette (2020) there are four (4) major instruments of price policy that have theoretical underpinning. The instruments are (i) minimum support prices (ii) procurement prices (iii) public distribution system and (iv) buffer stock.

Also read: G-SMART 2023 ELECTIONS SURVEY

• Minimum Support Prices: This is the foremost instrument like a long-term guarantee to producers. These prices are generally announced well in advance of the planting season. Once the minimum price for a product is announced, it implies that the government is committed to purchasing, by all means at the announced level of support price. Guenette (2020) emphasized that the theoretical basis for the guaranteed minimum price policy has several elements such as price stabilization, improvement of agricultural terms of trade and provision of insurance to agricultural producers. It is an incentive and assurance by the government to protect the farmers against excessive falls in prices in the event of bumper production (Das, 2021). The most important factors that are taken into account in fixing minimum support prices are; the available data on the cost of production, changes in input prices, changes effected in the administered prices of competing crops and the need to maintain overall stability in the general economy.
• Procurement Prices: Price policy also aims to stabilize prices on the part of the consumers especially in the case of food grains. In a situation of shortage, sailable supplies of food grains in the free market would generally be available at very high prices. Under such circumstances, the poor consumers of the community would be put to extreme hardship. Therefore, in view to achieve the objective of stabilizing prices on the part of the consumers, the government may adopt the system of public distribution. It can be in the form rationing; or fair-price shops. Here, it is of immense use to quote that public distribution system cannot operate unless necessary stocks are acquired by it. The best way to attain the stocks would be through the open market. But during the period of scarcity, it would only be possible if the government offers a higher price than the market price. Given this, the government adopts the procurement policy, under which producers are required to sell to the government, a part of their produce.
• Public Distribution System: Public distribution is another major instrument of price policy. It comprises two types of rationing, viz., statutory rationing and informal rationing. In the statutorily rationed areas, the open market is legally barred from functioning, the government undertakes the responsibility of supplying specific rationed quantities to consumers. In the areas of informal rationing, the open market is allowed to function so that the consumers can supplement the ration obtained from fair price shops by purchasing in the open market. The fundamental objectives of the public distribution system are to improve the distribution of basic goods, control the prices of essential commodities, meet the consumption needs of the masses, maintain good quality at low cost and bring stability to prices (Guenette, 2020).
• Buffer Stock: Buffer stocks refers to the buying and selling the stock with the sole purpose of moderating the price fluctuations. Buffer stocks serve as shock absorbers in the economy and provide a defense mechanism against widely fluctuating price levels. Under this policy, government builds stocks of food, agricultural goods and other essential commodities either through direct purchase from the domestic market or through imports from outside and release these stocks for sale in the domestic market when prices are going up. Thus, the government by supplementing the market supply prevents any sharp rise in prices which would have occurred if these supplies were not released from the stocks built up by it. On the contrary, if due to a good harvest, there is excess supply in the market, the prices would fall which leads to a decline in the farmer’s income. In such a situation, the government enters the market and makes direct purchases, thereby preventing a fall in prices. Therefore, buffer stock operations aim at eliminating unduly low prices consequent to bumper crops.

Also read: Concept of Leadership

Conclusion

It is expected that there lies short-term and long-term impact of price control when it is effectively and efficiently deployed by policy makers and the government. It will create social, economic and technological benefits. Some of the expected impacts are listed as follows:

1. It will reduce the burden of high price of rice and other staple foods on the consumers who are mostly poor citizens in the country.
2. It will curb persistence rise and volatility in the price of cereals and other major produce in Nigeria.
3. It will improve social and economic relationship among stakeholders in the food value chain industry.
4. It will foster long run social and economic stability in the country.
5. It will serve an impetus for policy and decision makers to develop right techniques for micro and macro-economic policy.

 

References

Das, R. C. (2021). Does Minimum Support Price Have Long-Run Associations and Short-Run Interplays with Yield Rates and Quantities of Outputs? A Study on Food and Non-food Grains in India. Review of Market Integration, 13(1), 42-65.

Guenette, J. D. (2020). Price Controls: Good Intentions, Bad Outcomes. World Bank Policy Research Working Paper, (9212).

Ojo, T. O., Ogundeji, A. A., Babu, S. C., & Alimi, T. (2020). Estimating financing gaps in rice production in Southwestern Nigeria. Journal of Economic Structures, 9(1), 1-18.

Morton, F. M. S. (2001). “The Problems of Price Controls.” Regulation 24(1), 50-54.

Murphy, F., A. Pierru, and Smeers, Y. (2019). “Measuring the Effects of Price Controls Using Mixed Complementarity Models.” European Journal of Operational Research 275 (2): 666-676.

 Shi, X., and Sun. S. (2017). “Energy Price, Regulatory Price Distortion and Economic Growth: A Case Study of China.” Energy Economics 63 (March): 261-271.

Tsakok, I. (2019). Agricultural price policy. In Agricultural Price Policy. Cornell University Press.

 

By

Dr. Sanusi Saheed Olakunle, PhD, MNIM.

Project Director

SmartAfrique R&D Consults Ltd

 

And

 

Peter Daniel (PhD)

Lead Consultant

SmartAfrique R&D Consults Ltd