It is important for government and policy makers to think beyond the tried and failed practices of imposing price controls.

Inflationary pressure in developing countries usually triggers government interventions such as price controls. Although the economic evidence amply shows that price controls, no matter how well intentioned, always end in economic failure, they remain one of the most popular forms of government action to stop price increases.

Price controls override the basic economic principle of market price discovery by demand and supply forces by setting an artificial price floor or ceiling which leads to market failures (creates excess in case of floor and a shortage in case of caps). It is precisely for this reason that price controls have long since been abandoned in developed countries. However, most developing countries still use price controls for energy, food and non-food products.

In Pakistan, the situation is no different. Here, price floors, price ceilings and price-based subsidies are common and regular occurrences for a long list of products, including energy, food and non-food items. Currently, district governments, and sometimes provincial or federal departments, are responsible for determining and regularly notifying the prices of essential commodities under various provincial laws.

For price determination, a number of methods and formulas are currently used. For most districts, prices of perishables, i.e. fruits and vegetables, are reported daily by adding a wholesale and retail margin to the nearest determined commodity price. mandi.

Prices for pulses, milk, meat and cereals are determined by district price monitoring committees composed of representatives of relevant traders, suppliers, manufacturers and consumers, including trade/industry associations.

District price monitoring committee meetings are held at regular intervals (usually once a month) to determine and notify the retail prices of products based on input received from committee members/stakeholders.

The prices of products receiving government subsidy, such as fertilizers, sugar, ghee and flour, etc., are sometimes determined at the national level, with the participation of provincial and federal ministries and relevant stakeholders. Prices for these products are generally determined using a cost-based approach or landed cost in the case of imported items.

Interestingly, there is no uniform or unique formula at the district, provincial or national level for determining the prices of essential items. Different sets of variables are used to determine prices for different products or for the same product in different districts. Regardless of the manner and formula used to determine prices, enforcement of price controls has always remained very difficult and unsustainable.

Prices of essential items are collected and collated daily, mainly by the Federal Bureau of Statistics (FBS) at the federal level and by relevant provincial departments at the provincial level. The data collected is used at various levels, such as the National Price Monitoring Committee of the Ministry of Finance and other relevant federal, provincial and district departments, mainly for the purpose of monitoring and controlling the prices of essential items.

It is, however, important to note that most of the time, product prices are determined and notified by the district management without taking into account the particular characteristics of the supply and demand situation in the district. To put it more specifically, district management when determining the price of a product does not take into account the gap between supply and demand at the district level for that particular product. This spread is unique for each district and mainly depends on whether a product is produced in a given district or is supplied from a source outside the district.

In fact, up-to-date and authentic data on the situation of supply and demand at the district level for each essential commodity is not available anywhere at the district, provincial or federal level and perhaps the absence of these crucial data is one of the fundamental obstacles to planning, design and implementation. non-price interventions in the market at these levels.

It is important to understand that in a free market, price is essentially a signal indicating the relative scarcity/excess of a product or service for producers and consumers. Simply introducing a mechanism to regularly monitor supply and demand patterns by district can very effectively predict potential price changes in the district(s) concerned. The potential price change can then be managed with various interventions. For example, if the pattern of a potential shortage of supply is observed for a district or in a number of districts, the immediate supply/diversion of supply from districts with excess supply may dilute the impact on short-term prices and for longer-term production or storage of these products at the district level can be improved.

Similarly, in districts where there is a surplus supply, the processing, storage and transport of products to other districts could be encouraged. Since there is no ban on the movement of goods or services between districts and between provinces, monitoring supply and demand at the district level and signaling appropriate interventions can have place via a web portal at the federal level with data accessible to all persons concerned. stakeholders at provincial and district levels. The availability and dissemination of this data for public use will not only help government interventions, but also create business opportunities for the private sector with the capacity to act in situations of high demand and scarcity.

In this regard, the district management can collaborate with the FBS or relevant provincial department heads to i) conduct a one-time mapping exercise of the supply and demand of essential commodities in their district and ii) share periodic data on changes in supply and demand levels in the district. This additional data can be collected without deploying more human resources and using technology such as a mobile application. A monitoring system can be introduced for a few essential items, such as wheat flour, sugar, pulses, chicken, milk and rice and later other items can be added to the list depending on needs.

District-level monitoring and interventions driven by the forces of supply and demand can bring multiple benefits in addition to preventing market failures that result from the continued imposition of price controls, such as i) allow for proper planning and resource allocation at federal, provincial and district levels, (ii) relieve the treasury of the cost of enforcing price controls, (iii) encourage investment in the retail sector and in wholesale, and iv) encouraging investment in the food processing and storage sectors, to name but a few.

In the current sequence of high inflation and tight economic conditions, it is important for government and policy makers to think beyond tried and tested failed practices of imposing price controls. Ideally, governments should refrain from intervening in the market. Income complementing unconditional direct cash transfers for the most vulnerable segments is a step in the right direction that should gradually replace all other subsidies.

The author is a former Member/Acting Chairman of the Competition Commission of Pakistan and an expert in economics for competition law. She can be contacted at [email protected]