Administered Price

Published Apr 5, 2024

Definition of Administered Price

Administered prices are prices that are not determined by the natural forces of supply and demand within a free market, but are set by government decree or by monopolistic or oligopolistic companies. These prices can be found in various segments of the economy, including utilities, pharmaceuticals, and transportation services. The rationale behind administered pricing can involve considerations such as achieving social objectives, preventing market abuses, or ensuring stability in essential services or goods.

Example

An example of administered pricing can be seen in the utilities sector, such as electricity or water services. In many countries, the government regulates the prices that utility companies can charge customers to ensure that these basic services remain affordable for all segments of the population. For instance, a regulatory body may set a fixed price for electricity per kilowatt-hour that reflects the cost of production plus a reasonable margin for the utility company. This protects consumers from potential price gouging in industries where competition is limited or non-existent.

Another area where administered prices are common is in pharmaceuticals, where governments may set maximum prices for essential drugs to ensure they are accessible to the general population, particularly in national healthcare systems.

Why Administered Price Matters

Administered prices play a critical role in economic and social policy. They can help to ensure equitable access to essential goods and services, especially in sectors where market failures might lead to unaffordable prices for significant portions of the population. Moreover, by protecting consumers from extortionate prices in monopolistic or oligopolistic markets, administered pricing can support public welfare and economic stability.

However, critics of administered prices argue that such interventions can distort market signals and incentives for businesses to innovate or improve efficiency. If prices are set too low, for instance, there may be insufficient investment in maintaining or upgrading essential infrastructure. Conversely, if prices are set too high, it can lead to reduced consumption or the exclusion of lower-income households from access to basic services.

Frequently Asked Questions (FAQ)

How do governments decide on the appropriate level for an administered price?

Governments and regulatory bodies typically decide on administered prices through extensive consultations and analysis. They consider factors such as the cost of production, desired social outcomes, and the need for companies to earn a reasonable profit margin that encourages ongoing investment and maintenance. This process may involve complex negotiations and regular adjustments to reflect changes in costs, consumer demand, or policy objectives.

What are the potential drawbacks of administered prices?

While administered prices aim to serve the public interest, they can have several drawbacks. These include inefficiencies due to lack of competition, potential shortages if prices are set below the cost of production, and the burden on public resources if subsidies are involved. Additionally, administered prices can stifle innovation and investment if companies cannot achieve adequate returns on their investments.

Can administered prices change over time?

Yes, administered prices can and often do change over time. Regulatory bodies may adjust prices in response to shifts in the cost of production, inflation, or changes in national economic policies. The objective is to balance affordability for consumers with financial viability for providers, ensuring sustained provision of the goods or services in question.

By setting and adjusting administered prices, governments and regulatory bodies can influence the accessibility and affordability of essential goods and services. This approach, when carefully managed, can play a vital role in achieving broader socio-economic goals, such as poverty reduction, public health, and economic stability.