What is 'Fixing'

Fixing is the practice of arbitrarily setting the price of a good, commodity or currency. Fixing represents a refusal to allow the forces of a free market to determine the price of the good. It can be either legal or illegal depending upon who mandates the fix, such as the government or a group of merchants. Although, fixing usually refers to price fixing, it can be applied to input costs or fixing supply. For example, governments can mandate the quantity of goods produced. This practice is largely a feature of centrally planned command economies.

BREAKING DOWN 'Fixing'

Fixing a price creates numerous inefficiencies in an economy. The price of a good or service is determined by supply and demand. Where these two forces meet is what determines the price. If the price of a good or service is arbitrarily set too high, then this creates a situation where supply exceeds demand. More people are willing to supply the good at the high price than are willing to buy it. The opposite is true for a price that is arbitrarily set too low. This creates a situation where people's demand for the under-priced good exceeds other people's willingness to supply it.

Fixing can take many forms. OPEC artificially quadrupled the price of oil in the 1970s and effectively cut off its supply to much of the western world. Cartels are formed for the purpose of fixing the price of one or more of the goods that they produce, such as oil or other commodities. Capitalist governments also fix the prices of certain goods to promote smaller companies to enter the industry, but this is rare.

Fixed Exchange Rate

One of the most common forms of price fixing is on the international foreign exchange market. This is commonly known as a currency peg, where the government of a smaller country fixes the price of its currency to the currency of a larger economy. For example, many countries in the Persian Gulf, like the United Arab Emirates and Qatar, peg their currencies to the U.S. dollar. They tend to do this because their economies are small and can be subjected to external market forces that are difficult to predict. Mostly they do this because their economies are highly dependent on oil exports that are priced in U.S. dollars on the international petroleum markets.

Until 1973 the U.S. dollar was fixed to the price of gold, known as the gold standard, and other world currencies were fixed to the dollar. After 1973, the gold standard ended, and the dollar became a floating exchange rate, which effectively ended the fixing of its price to other currencies. 

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