An administered price is a price determined by a governmental or other nonmarket entities rather than market forces of supply and demand. These prices are imposed through regulation or policy decisions and serve various economic or social objectives.
Types of Administered Prices
Wage Controls
Wage controls are a form of administered price where the government regulates the pay rates within certain industries or sectors. This can occur during times of economic crisis to control inflation or ensure living wages.
Rent Controls
Rent controls refer to the regulatory measures that set limits on the amount landlords can charge tenants for housing. These controls are usually implemented to ensure affordability and protect tenants from exorbitant rent increases.
Historical Context
Administered prices have been used throughout history, particularly during times of war, economic crises, or massive inflation. For example, during World War II, many governments imposed price controls to prevent inflation and ensure the fair distribution of scarce resources.
Applicability and Example
An example of administered pricing is the minimum wage law. Governments impose a lower limit on the hourly wages that employers can legally pay their workers. The objective is to ensure a basic standard of living for employees.
Comparisons and Related Terms
- Market Price: Unlike an administered price, a market price is determined by the interplay of supply and demand forces.
- Subsidized Price: Often confused with administered price, but subsidies usually lower the price below the market price with government financial support.
- Price Ceiling: A type of administered price where a maximum limit is set on the price that can be charged for a product or service.
FAQ
What is the role of administered prices in the economy?
Administered prices aim to stabilize the economy, achieve social equity, and protect consumers. However, they can also lead to market distortions if not carefully managed.
What are the drawbacks of administered prices?
They can lead to inefficiencies, shortages, and black markets. For example, rent control can reduce housing supply over time if landlords find it unprofitable to offer rentals.
Summary
Administered prices play a significant role in economic policy by allowing governments to regulate certain aspects of the market for public welfare. While they offer several benefits, such as economic stabilization and social equity, they can also lead to market distortions if not implemented carefully.
References
- Samuelson, Paul A., and William D. Nordhaus. Economics. McGraw-Hill Education, 2010.
- Mankiw, N. Gregory. Principles of Economics. Cengage Learning, 2011.
By understanding administered pricing, stakeholders can better navigate the regulatory environments that impact various markets and economic activities.
