Economics: Role of Government in Determination of Price and Quantity: Introduction and Forms of Administered Price

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Introduction

In some cases, the price of a commodity is determined by the government to protect the interest of consumers or producers. Sometimes the government does not allow free play of the forces of demand and supply for determination of price of some commodities in order to protect the interest of consumers or producers. Government can fix the price of the commodity either below the equilibrium price or above the equilibrium price. Such a price is called administered price (Government determined price).

Forms of Administered Price

Forms of Administered Price

Forms of Administered Price

Control Price

It is the maximum price which is fixed by the government which is lower than the equilibrium price of the commodity. It is also known as ceiling price. This price is fixed by the government to protect the consumers who cannot afford to pay higher prices. This situation arises when the production of a commodity is less than its demand. Due to excess demand for the commodity at ceiling price government resorts to rationing. Rationing means fixing of quota per head per unit of time.

Support Price

It is the minimum price which is fixed by the government which is higher than the equilibrium price of the commodity. This price is fixed by the government to safeguard the interest of producers. This situation occurs when producers are not able to cover their cost of production at equilibrium price. At support price government is ready to purchase any quantity of the commodity to make buffer stock of the commodity.

Token Price

It is price charged by the government or charitable institutions for some essential services which is much lower than the actual price incurred by the government per head. Token price is charged in order to prevent the wasteful use of these services.

Dual Price

Dual price is a situation where government half of the production of goods and services are sold at control price and the remaining is sold at equilibrium price which is decided by the forces of demand & supply of goods and services in the market.

Effect of Taxes and Subsidies on Market Price

  • Government imposes various types of taxes on production and sales of the commodities and also on the imports of raw material etc. in the form of excise duty, sales tax and import duty, respectively. These taxes are beard by producers, sellers and importers and indirectly recovered by the consumers as it is included in the price of the commodity. When rate of taxes are increased the price of the commodity also increase.

  • Government gives subsidy to the producers to sell some goods at a lower price in order to make the commodity available to the common men at a reasonable price. Thus, an increase in subsidy leads to decrease in market price of the commodity.

Public Distribution System (PDS)

PDS is a system adopted by the government to provide essential commodities to those people who cannot afford it at their market prices. These commodities are made available through ration shops with a proper identification paper called ration card. Essentials of PDS in India are:

  • Subsidy: Government gives subsidies on goods sold through PDS.

  • Fixed Quantity (Rationing): : Government fixes the quantity (quota) per head per unit of time on the basis of minimum requirement of a person.

  • Fair Price Shops (FPS): Government sells these commodities through fair price shops popularly known as ration shops. These shops are opened in all parts of the country.

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