An administered price, also known as a rigid price, refers to a price set by an authority, such as a government or a large organization, rather than being determined by the free market dynamics of supply and demand. Unlike market-driven prices that fluctuate based on changes in supply and demand, administered prices are relatively stable over time.
Types of Administered Prices
Government-Administered Prices
Governments often set administered prices to stabilize essential goods and services. For instance, prices for utilities like water and electricity, healthcare services, and basic food items may be regulated to ensure affordability and accessibility.
Corporate-Administered Prices
Large corporations might also set rigid prices for their products. This can be seen in industries where a single company has significant market control, such as technology companies setting prices for proprietary software or patented drugs.
Significance and Impact
Price Stability
Administered prices contribute to economic stability by preventing drastic price fluctuations that could arise from volatile market conditions. This is especially important for goods that are essential for daily living.
Consumer Protection
By setting administered prices on basic commodities, authorities aim to protect consumers from unfair pricing and market manipulation. This is particularly important in times of crisis or inflation.
Market Distortions
While they provide stability, administered prices can sometimes lead to market distortions. For example, if the price set is too low, it may discourage production, leading to shortages. Conversely, if the price is too high, it might cause a surplus.
Examples
Utility Services
Countries may implement administered pricing for utilities to keep them affordable. For instance, the price of electricity might be regulated to ensure it remains within the means of average households.
Pharmaceutical Industry
In some nations, the government negotiates drug prices with pharmaceutical companies to make medications affordable for the public, especially critical or life-saving drugs.
Historical Context
Administered pricing has been utilized throughout history, particularly during wartime or economic crises, to maintain stability. During the Great Depression, the U.S. government adopted administered prices to stabilize the economy and ensure access to essential goods.
Applicability in Modern Economics
In contemporary economic systems, administered prices play a crucial role in developing and developed countries alike. They are especially relevant in sectors where market failures are prevalent, such as healthcare and public utilities.
Comparisons
Administered Price vs. Market Price
- Administered Price: Set by authorities or large entities, remains stable over time.
- Market Price: Determined by supply and demand dynamics, fluctuates based on market conditions.
Administered Price vs. Price Ceiling/Floor
- Administered Price: Actively set and maintained by an authority.
- Price Ceiling/Floor: Limits established to prevent market prices from moving beyond certain bounds.
Related Terms
- Price Controls: Government-imposed limits on how high or low a price can be set for a product.
- Subsidy: Financial assistance provided to reduce the cost of goods and services, often linked with administered pricing.
FAQs
Q1: Why are administered prices important?
Q2: Can administered prices lead to negative consequences?
Q3: Are administered prices permanent?
References
- Samuelson, P. A., & Nordhaus, W. D. (2009). Economics. McGraw-Hill.
- Stiglitz, J. E. (2000). Economics of the Public Sector. W.W. Norton & Company.
- Mankiw, N. G. (2014). Principles of Economics. Cengage Learning.
Summary
Administered prices, or rigid prices, are vital economic tools used by governments and corporations to stabilize markets, protect consumers, and ensure the affordability of essential goods and services. While they offer significant advantages, they must be carefully controlled to avoid negative market distortions. Understanding administered prices is crucial for comprehending how modern economies manage stability and growth.
