Administered price definition
/What is an Administered Price?
An administered price is dictated by an entity that can supersede the effects of supply and demand. It is usually considered to be less than optimal when it causes prices to be higher than would otherwise be set by the market. When the price is set too low, it tends to drive producers out of the market, or to sell their goods elsewhere.
Examples of Administered Prices
As an example of an administered price, a government regulatory commission can set the price at which electricity will be charged to customers. Similarly, a company with a monopoly over a key raw material can set a price that is higher than the market would otherwise pay. Or, an oil cartel sets the price of oil higher than the price that a freely-functioning market would set. These examples are all cases of administered prices.
Disadvantages of Administered Prices
There are a number of disadvantages associated with the use of administered prices. Here are several of the more significant issues:
Reduces market efficiency. Administered prices can lead to an inefficient allocation of resources because prices may not reflect the true balance of supply and demand. This misalignment often leads to either shortages or surpluses.
Distorts market signals. In a free market, prices act as signals for production and consumption. When prices are administered, they don’t accurately convey information on scarcity or consumer preferences, which can lead producers to make decisions that don’t match real market needs.
Encourages black markets. When administered prices are set below the equilibrium, they can create shortages, pushing consumers to seek goods on black markets where prices are higher but supply is more reliable.
Bureaucratic inefficiencies. Administered pricing systems often require significant bureaucracy to enforce and monitor prices, which can be costly and slow, especially in large or complex markets.
Consumer and produce dissatisfaction. If administered prices don’t align with market reality, both consumers and producers may become dissatisfied. Consumers might face shortages, while producers might struggle with unsustainable pricing structures.
Discourages private investment. When prices are controlled, investors may be hesitant to invest in industries with administered prices due to concerns about profitability, limiting growth and innovation in these sectors.