Dear Editor,

In especially times of Economic strife where every cent does count it is perhaps wise to have regular reference to the General Price Order.

Accessible on MCIL’s website, the price order could save one a couple of tala in making purchases for products considering it clearly lays out legally established maximum prices for products being sold on the shelves of shops, supermarkets etc in Samoa.

It is imperative to perhaps understand the underlying rationale of price orders in economies. For instance in New Zealand, price fixing was undertaken principally for the protection of consumers within the country in the period when foreign demand was increasing rapidly and the prices of all commodities was raising rapidly.

There are many publications on underlying rationale for a need for price controls similar to those administered by Samoa in her General Price Order. When one reads for instance Hugh Rockoff’s views on the same (http://www.econlib.org/library/Enc/PriceControls.html) a fairly balanced perspective emerges.

Hugh states, “Governments have been trying to set maximum or minimum prices since ancient times. The Old Testament prohibited interest on loans to fellow Israelites; medieval governments fixed the maximum price of bread; and in recent years, governments in the United States have fixed the price of gasoline, the rent on apartments in New York City, and the wage of unskilled labor, to name a few.

At times, governments go beyond fixing specific prices and try to control the general level of prices, as was done in the United States during both world wars and the Korean War, and by the Nixon administration from 1971 to 1973.

The appeal of price controls is understandable. Even though they fail to protect many consumers and hurt others, controls hold out the promise of protecting groups that are particularly hard-pressed to meet price increases. Thus, the prohibition against usury—charging high interest on loans—was intended to protect someone forced to borrow out of desperation; the maximum price for bread was supposed to protect the poor, who depended on bread to survive; and rent controls were supposed to protect those who were renting when the demandfor apartments exceeded the supply, and landlords were preparing to “gouge” their tenants….”

He further states, “The reason most economists are skeptical about price controls is that they distort the allocation of resources. To paraphrase a remark by Milton Friedman, economists may not know much, but they do know how to produce a shortage or surplus.

Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time.

Suppose that the supply and demand for wheat flour are balanced at the current price, and that the government then fixes a lower maximum price. The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without.

Because controls prevent the price system from rationing the available supply, some other mechanism must take its place. A queue, once a familiar sight in the controlled economies of Eastern Europe, is one possibility.

When the United States set maximum prices for gasoline in 1973 and 1979, dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline, receiving in the process a taste of life in the Soviet Union.

The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled…..” Not only do producers have an incentive to raise prices, but some consumers also have an incentive to pay them.

The result may be payments on the side to distributors (a bribe for the superintendent of a rent-controlled building, for example), or it may be a full-fledged black market in which goods are bought and sold clandestinely.

Prices in black markets may be above not only the official price but even the price that would prevail in a free market, because the buyers are unusually desperate and because sellers face penalties if their transactions are detected, and this risk is reflected in the price.

With all of the problems generated by controls, we can well ask why they are ever imposed and why they are sometimes maintained for so long. The answer, in part, is that the public does not always see the links between controls and the problems they create.

The elimination of lower-priced lines of merchandise may be interpreted simply as callous disregard for the poor rather than a consequence of controls. But price controls almost always benefit a subset of consumers who may have a particular claim to public sympathy and who, in any case, have a strong interest in lobbying for controls.

Minimum-wage laws may create unemployment among the unskilled or drive them into the black market, but minimum wages do raise the income of those poor workers who remain employed in regulated markets…..”.

Bearing the above in mind, perhaps the key question could be is it more advantageous for the general consumer in Samoa to have price controls in place or not.

Stephen Musubire

ZoEn Consults,Vaitele