Tuesday, June 03, 2008

A Case for Price Control

I know that economists are supposed to be against price control. Let market decide what is the appropriate value of goods and services.

But there is exception for every rule.

Galbraith wrote a little known gem entitled, Theory of Price Control. He was the price czar and ‘kind of” economic advisor to Kennedy in addition to be longtime economic professor at Harvard.

In essence he argued that price control should be in inverse proportion of market perfection. The worst the market function, the more price control can do to improve general welfare.

After the rise of fuel price in Indonesia, we fitness price of goods and services are rising. The bus transportation even pushes for 25 % increase for bus fee despite the fuel price increase "only" 28.7 %.

So we face some kind of prisoners’ dilemma in here. Everybody is raining the price of their product in anticipation of the rise of other products in order to protect there purchasing parity in addition of cost transmission.

In human term, the price increase is happening partly because increase in price of inputs and partlyattempt to maintain ability to consume similar bundle of items.

Considering the market for public transportation and agricultural goods are hardly perfect then what is needed for the expert (and economist) to start calculating the multiplier impact tof fuel increase, with solid methodological foundation, to the economy (especially tran sport and agricultural goods) and come up with just and appropriate price.

The Central Bank could help with a bit monetary tightening.

Somehow the public and newspaper overlook (again) that most people in Indonesia are public transportation user and food consumers that will bear the brunt of the price increase.

If the government need to step in to calm the irrational exuberance, so be it.

1 comment:

fajar said...

salam kenal