What Is an Administered Price?
An administered price is the price of a good or service as dictated by a government or centralized authority, as opposed to market forces of supply and demand. Administered pricing has appeared in communist regimes such as the Soviet Union, and is discredited by many economists as being inefficient and unsustainable. In market economies, certain administered prices can exist in the form of price ceilings or rent controls.
- An administered price is one that is decreed by some authority for a good or service, rather than through a process of price discovery in a free market.
- Centrally planned governments such as communist Soviet Union or Cuba that follow a Marxist-Leninist philosophy tend to rely on such pricing mechanisms as they reject capitalism and markets.
- Even in capitalist market economies like the U.S. or in Europe, some prices are set administratively such as in the case of rent controls, or price controls on food items and basic goods.
How Administered Prices Work
Centrally planned economic systems such as communist 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.
Administered Prices in Market Economies
Theory aside, capitalist economies do not entirely shun administered prices. 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.
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.
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.