Price Determined by Government

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Price of a commodity in the market is basically fixed by the forces of demand and supply. That price is called equilibrium price (price when quantity supplied = quantity demanded). But for some commodities, all the people of the country may not be able to buy at market prevailing price. On the other hand all producers may not be willing to produce at the market prevailing prices. For those commodities which are essentials of masses will be fixed either above the equilibrium price or below the equilibrium price by the government in order to protect buyers and producers. Such a price is called ‘administered price (Government determined price)’.

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Based on condition administered prices may be in the form of:

i) Control Price

ii) Support Price

iii)Token Price

iv) Dual Price

Control Price:

Control price is basically fixed in order to protect consumers. At prevailing market price some people (poor people) are unable to buy. Then the government will fix maximum price for the commodity which is below the equilibrium price. That maximum price is called control price or ceiling price. Control price is fixed for goods such as wheat, rice, sugar, kerosene oil etc. which are essentials of masses.

As the price of commodity is less than the price of the market there will be more demand, according to the law of demand. During this stage government follow rationing procedure (fixing of quota of commodity per head per unit of time). Due to excess demand of the commodity problem of black marketing may also arise. Black marketing is a situation in which seller illegally charges higher price than the ceiling price from the consumers.

Support Price: Support price (also called minimum support price) is basically fixed for essential commodities of masses in order to protect producers. Due to excess supply the reveling market price is much below the cost of production. To resolve this problem government fix the price of commodity higher than the equilibrium price. Otherwise many producers will stop producing the goods which are essential to masses like rice, wheat etc. results shortage of food grains to the citizens.

The system of support prices assures the farmers that they will be able to sell their products at least at this price. In case of excess supply government will purchase at minimum support price from the producer and store them in godowns for future use. Also the excess supply will be moved to deficit areas.

Token Price:

There are some goods and services which are considered necessary for the existence of life e.g. medical services, health services and education services. Poor people may not afford those services. This will increase the problem of poverty. In order to avoid that, the government reduces the price of services which are necessary. That reduced price is called token price.

Example: Tuition fees in schools and medical expenses in hospitals are below the market price. They are fixed at Token price.

Token price is charged in order to prevent the wasteful use of these services otherwise these services are misused.

Also there are some Private Charitable institutions providing goods and services to the poor people at Token price (much below the market price).

Dual Price:

Due to control pricing, seller may loss some extra income, that may leads to black marketing. In order to avoid that problem government has implemented this dual pricing policy. Under dual price policy, seller will sell some portion of his goods at control price for below poverty line people and the surplus can be sold in open market at market price.

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