The Impact of Price Restrictive of Economic Goods Another Point of View in the Governmental Pricing

Abstract

Resource allocation mechanisms are considered as one of the most important economic policy tools on the use of which economic systems differ considerably according to ideological, political or even social considerations at times. However, market price is considered to be one of the most important resource allocation mechanisms where the forces of supply and demand determine equilibrium price and quantity. But it has become increasingly customary for economic authorities to restrict prices for political or social reasons by imposing a price which is higher or lower than the market price. Since this may affect the supply and demand sides of the exchange process , the study attempted to trace the effect of this on the optimum allocation of economic resources. The study concludes that restricting prices by imposing price ceilings has the effect of reducing consumer surplus both in the short and long runs depending on the elasticity of supply. An example is the price restriction of gasoline, wheat, and animals feed. Since Pareto optimality postulates a situation that cannot be improved upon , it follows that the maximum consumer surplus cannot be attained with a price restriction but rather without it.