Author: Hafiz Noor Shams

This is just for my own future use.

Following is the list of 11 price-controlled items:

1. Petrol
2. Diesel
3. Liquefied petroleum gas
4. Steel
5. Cement
6. Flour
7. Sugar
8. Condensed milk
9. Bread
10. Chicken
11. Cooking oil

Following is the list of 20 supply-controlled items,
whereby supplies are regulated ensure demand is always met.

1. Sugar
2. Milk (including condensed, powdered milk, cream)
3. Salt
4. Cement and clinker
5. Flour
6. Cooking oil
7. Fertiliser
8. Insecticide
9. Formic acid
10. Mild steel, round bar
11. Kerosene
12. Preserved fish
13. Rice (in Sabah state only)
14. Paddy (in Sabah state only)
15. Petrol
16. Diesel
17. Liquefied petroluem gas
18. Bread
19. Fuel
20. Chicken [Malaysia’s web of price and supply controls. Reuters. March 26 2008]

What are the implications of the two control methods?

Price control will cause shortage or surplus when the list prices are disconnected from that of the market. Shortage occurs when prices are set lower than it should be. Producers will not have the incentive to produce as much as the level they would produce under free market condition while consumers will demand more than what they would normally do under free market. When surplus occurs, prices are simply set too high compared to what free market would call for; producers will produce too much and consumers will demand too little.

Supply control affects only the supply curve but it distorts the market nonetheless. This method forces prices that consumers pay to go higher than what equilibrium would otherwise produce when supply is set less than free market quantity. This is a producer-friendly policy as producers are able to charge consumers with higher prices than what free market would dictate. In other words, shortage is beneficial to producers. The exact opposite of the mechanics is true when supply is set higher than equilibrium.

The two methods reach roughly the same conclusion but the dimensions which each method tackles must be noted.

The two methods have one common characteristic: it amplifies an effect called price stickiness. There is always a lag in updating the set prices or quantity to match the prevailing situation of the market. In that way, these controls are inferior to free market mechanism as information disperses among participants of the market faster than those in the state responsible for the controls could react.

That brought me to an intriguing question: if those in the state could react faster to some relevant information with those controls compared to those in the market, would that make the market as an inferior tool to the controls?

Maybe that is a good thesis to explore. Hmm…

And I am done with my mental masturbation for today.