Overview
An administered price is a price set by a governmental or nonmarket agency rather than being determined by market forces. This can be applied to both goods and services to achieve certain economic or social objectives such as controlling inflation, ensuring affordability, or preventing market monopolization. Common industries affected by administered pricing include healthcare, housing, and utilities.
Examples of Administered Prices
- Rent Controls: A type of administered pricing where the government sets a maximum rent that can be charged for residential properties to make housing more affordable.
- Wage Price Controls: Government-set floors or ceilings on wages to control inflation or unemployment rates. This is often enacted during extraordinary circumstances such as wartime.
- Subsidized Healthcare Prices: Prices of healthcare services set or influenced by government subsidies to make healthcare accessible to more individuals.
- Agricultural Price Supports: Governments may set minimum prices for agricultural products to ensure farmers have stable and sufficient income.
Frequently Asked Questions (FAQs)
What is the purpose of administered pricing?
Administered pricing aims to intervene in the market to achieve various goals such as controlling inflation, ensuring fair wages, making essential goods affordable, and stabilizing an economy.
How does administered pricing differ from market pricing?
Administered pricing is set by a governmental or nonmarket agency, whereas market pricing is determined by supply and demand dynamics.
Are administered prices effective?
The effectiveness of administered prices can vary. They can achieve equitable access or affordability, but can also lead to market inefficiencies or shortages if mismanaged.
What are some common criticisms of administered prices?
Critics argue that administered prices can distort market signals, lead to shortages, and reduce incentives for producers to innovate or improve efficiency.
Can administered pricing exist in a free-market economy?
Yes, administered pricing can coexist with market pricing, especially in mixed economies where the government regulates certain sectors while free market principles operate in others.
Related Terms
- Price Ceiling: A maximum price set by the government for a particular good or service.
- Price Floor: A minimum price set by the government for a particular good or service.
- Subsidy: Financial assistance provided by the government to lower the cost of a good or service to benefit the public.
- Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
- Market Equilibrium: The state where the supply of a good matches its demand.
Online References
- Investopedia: Price Ceiling
- Wikipedia: Price Control
- The Balance: Advantages and Disadvantages of Rent Control
Suggested Books for Further Studies
- “Economics: Principles, Problems, and Policies” by Campbell McConnell, Stanley Brue, and Sean Flynn
- “Microeconomics: Theory and Applications” by Edwin Mansfield, Gary Yohe
- “Principles of Macroeconomics” by N. Gregory Mankiw
- “Price Theory and Applications” by Steven E. Landsburg
Fundamentals of Administered Price: Economics Basics Quiz
### What is an administered price?
- [ ] A price determined solely by market forces.
- [x] A price specified by a governmental or nonmarket agency.
- [ ] A price chosen by producers collectively.
- [ ] A price based on international market trends.
> **Explanation:** An administered price is set by a governmental or nonmarket agency, unlike market-determined prices that are influenced by supply and demand.
### Which of the following is an example of an administered price?
- [ ] Stock market prices
- [x] Rent controls
- [ ] Gasoline prices at a private station
- [ ] Prices of luxury goods
> **Explanation:** Rent controls are a form of administered pricing where the government sets a limit to make housing more affordable.
### What is a common criticism of administered prices?
- [ ] They always lead to lower prices.
- [ ] They align perfectly with market conditions.
- [x] They can distort market signals and lead to shortages.
- [ ] They eliminate market competition.
> **Explanation:** Administered prices can distort market signals and lead to inefficiencies and shortages if not managed properly.
### What economic concept does administered pricing aim to control or influence?
- [ ] Market competition
- [ ] Supply chains
- [x] Inflation and affordability
- [ ] Technological advancement
> **Explanation:** Administered pricing often aims to control inflation and ensure the affordability of essential goods and services.
### How do price floors affect the market?
- [x] They create a minimum selling price for goods or services.
- [ ] They eliminate demand for luxury goods.
- [ ] They are always lower than market prices.
- [ ] They destabilize the economy.
> **Explanation:** Price floors set a minimum price for goods or services, which can affect supply and demand dynamics.
### Who sets administered prices?
- [ ] Private corporations
- [ ] Independent market analysts
- [x] Government or nonmarket agencies
- [ ] International organizations
> **Explanation:** Administered prices are set by governmental bodies or nonmarket agencies as part of regulatory measures.
### What happens when a price ceiling is set below the equilibrium price?
- [x] It can lead to shortages of the good.
- [ ] It stabilizes the market automatically.
- [ ] It creates a surplus of the good.
- [ ] It has no effect on supply and demand.
> **Explanation:** A price ceiling set below the equilibrium price can lead to shortages because the quantity demanded exceeds the quantity supplied.
### Why might governments implement wage price controls?
- [ ] To increase competition among businesses.
- [ ] To stabilize financial markets.
- [x] To control inflation or unemployment rates.
- [ ] To encourage investment in technology.
> **Explanation:** Governments may implement wage price controls to stabilize the economy by controlling inflation or unemployment rates.
### What is a potential benefit of administered pricing?
- [ ] Higher market prices.
- [x] Ensured affordability of essential goods.
- [ ] Increased volatility in markets.
- [ ] Lowered government intervention.
> **Explanation:** Administered pricing can ensure the affordability of essential goods and services, making them accessible to wider populations.
### What is the primary difference between administered prices and market prices?
- [x] Administered prices are set by governmental or nonmarket agencies, while market prices are determined by supply and demand.
- [ ] There is no difference; both are influenced by government policies.
- [ ] Administered prices always lead to surpluses, whereas market prices do not.
- [ ] Market prices are fixed, while administered prices fluctuate frequently.
> **Explanation:** The primary difference is that administered prices are set by governmental bodies, while market prices are influenced by the forces of supply and demand.
Thank you for exploring the concept of administered prices with us. Understanding the impact of such policies helps grasp their role in various economic environments!
