South-Western College Publishing - Economics  
Market Meddling
Subject Price Ceilings
Topic Market Interference
Key Words Price Controls, Inflation, Prices, Profit, Costs, Shortages
News Story

The Governor of the Krasnoyarsk territory in Siberia, like some other Russian governors, has introduced price controls in response to the inflation and panic buying caused by the financial crisis. For example, store-owners can only charge 10 percent more than they pay for food from wholesalers or farmers. The prices of meat, fish, bread, flour, cereal, pasta, beverages and coal are now controlled. Wholesalers need permission to raise prices, and they have been told that they should earn only 2 percent profit. Tax police enforce the measures through fines.

Businesses complain that their lower profits hinder their ability to deal with the turbulent economic situation. They have difficulty covering their other costs such as utilities and security. They are cutting costs by reducing hours of work. Consumers face shortages because producers are sending their goods to regions where there are no price controls. However, the Governor of Krasnoyarsk has stated that these measures are only short-term.

(Updated November 11, 1998)
Questions
1. a) Draw a diagram of the market for meat in Krasnoyarsk. Show the demand and supply curves and mark the equilibrium price and quantity of meat prior to the imposition of price controls.
  b) Draw a horizontal price line on your diagram assuming that the price controls on meat were effective.
   
2. The objectives of the controls were to limit inflation and stop panic buying.
  a) Explain in terms of your diagram whether inflation was limited.
  b)Price controls have a tendency to give rise to a black market. Why would people be willing to pay more than the controlled price for meat? Explain in terms of your diagram (especially the meaning of the demand curve).
  c)Why would the price controls be unlikely to stop frenzied buying? Explain, referring to your diagram.
   
3. One effect has been that producers are cutting back on production and on supply to controlled markets. Explain, using your diagram, why producers are doing this.
Source Michael R. Gordon, "One Patch of Russia's Economic Crazy Quilt, Growing Increasingly Tattered", The New York Times, September 23, 1998.

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