DEFINITION of Administered Price
An administered price is the price of a good or service as dictated by a government, as opposed to market forces.
BREAKING DOWN Administered Price
Examples of administered prices include price controls and rent controls. Price controls are often imposed to maintain the affordability of certain goods and to prevent price gouging during shortages (of gasoline, for example). Rent control and stabilization are used to limit rent rises in certain cities.
Price controls may specify a price ceiling (an maximum), a price floor (a minimum), or both. They may apply to staple goods such as sugar and soap, or more intangible prices such as interest rates. They may change in response to shifts in supply and demand, either by design or on an ad hoc basis.
Centrally planned systems such as the Soviet Union and Cuba employed price controls extensively (Cuba continues to do so). In both of these examples, the market for food and consumer goods was characterized by chronic shortages. Bread lines were a fact of life in the Soviet Union, and a thriving black market existed to supplement unmet demand. Other attempts at limiting prices across an economy, for example by the Committee of Public Safety during the French Revolution and the Roman Emperor Diocletian in the third century, have been largely unsuccessful.
Classical economic theory purports to explain why price controls tend to lead to shortages. The supply curve has an upward slope, meaning the higher prices correspond to greater supply; the demand curve has a downward slope, so higher prices correspond to lower demand. If a price is set lower than the market equilibrium price – the point at which the two curves intersect – the quantity supplied will be less than the quantity demanded: in other words, there will be a shortage.
Theory aside, capitalist economies do not entirely shun administered prices. Rent control is used to keep housing stock affordable in New York City, but the demand for these cheap apartments far outstrips the supply. Since market-rate rents are among the highest in the country, rent-controlled apartments in the city are often passed down within families as a coveted good.