Tuesday, August 30, 2016

Price control on seven commodities

The Indonesian government is setting the minimum and maximum prices on seven commodities, namely meat, soybean, rice, sugar, red chili and shallot (onion).

Is it a good idea for the government to set prices to "stabilize the market"?

Price controls is generally good to protect consumers. If the prices are adjusted according to world market prices, this mechanism is good for both traders and consumers. It prevents exploitation of consumers who may not be aware about the fair prices of the products.

If there is a shortage of the commodity, the traders may withdraw the stock from the market waiting for the price to increase. This is a disadvantage of the price control mechanism. The negative impact can be minimized by adjusting the prices quickly according to the market condition.

An alternative approach to price controls is for the government to published the market prices as a benchmark to be used by consumers. The traders are likely to follow the published benchmarks.

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