Price Intervention in the Market System
The science of economics seeks answers to the questions of who will produce, for whom, how much to produce, how much to produce and how much to sell. The answer to these questions leads us to the answer to the question of how to use the limited resource at hand, which is called the ‘allocation problem’ in economics. Throughout history, mankind has tried to solve the allocation problem by resorting to three different methods: tradition method, market method, command method (central planning.)
In the tradition-based system, economic problems such as the type of goods and services to be produced, their quantities and prices are solved not by the market, but by the leaders of the society, or the public authority in today’s sense, according to tradition. In the pre-market economy periods, it was obligatory for those who produced under the order of an authority and sold what they produced, as well as those who produced on their own behalf and offered them to the market, to comply with the prices and tariffs determined by this authority.
In the system based on the market method, production, consumption and shopping always operate according to the rules of supply and demand. The public authority only tries to prevent unfair competition and monopolistic tendencies. Markets and fairs established in cities in the Middle Ages grew into shopping centers attended by people from outside the city, and the market system developed. Over time, the kings began to collect market tax from the merchants who transacted in the markets. The municipality occupation fee paid by those who open stalls in the market today is the continuation of this practice in the feudal period.
After the establishment of the Soviet Union, the central planning system was put into practice. In this system, the public authority gave the answers to the questions of who will produce for whom, how much and for how much, within the framework of this central planning system.
When we look at the results obtained from the implementation of these three systems to date, we can understand that the market system is the system that solves the resource allocation problem in the most correct way, since the economies that implement the other two systems are also trying to transition to the market system.
From time to time, some economies that implement market economy tend to switch to the command method. For example, Turkey entered into such a practice in the 1970s. On the one hand, while the market economy was in force, on the other hand, price controls were initiated. The state established a committee called the Price Control Committee. This committee was examining, approving, rejecting or accepting the applications of private sector organizations that wanted to increase prices. As this practice became widespread, black market emerged all over Turkey, especially in big cities. Turkey abandoned these practices in the mid-1980s and returned to the market system.
Recently, intervention in the market system in Turkey with non-market methods has begun. Although the market seems to be free at first glance, the public authority intervenes in prices with verbal guidance, detective measures and administrative penalties. Moreover, these interventions are not limited to the goods and services market, they cover a wide area from interest rates to exchange rates. Since it is very similar to the Price Control Committee practice in the 1970s, it is highly likely that this suppression will turn into a black market after a while.
If your agriculture and livestock policy is wrong, you will inevitably have to intervene at the sales stage and the system will be chained. Trying to solve the problems in the market with measures to increase production instead of trying to solve the problems through price intervention prevents both the damage to the price and market mechanism and the emergence of a black market.
Note for economics students : Price Formation in the Black Market: (Mahfi Eğilmez Mikroekonomi, Remzi Publishing House, 6th edition, November, 2018.)
Let’s assume that when the government does not determine the price and does not intervene in the market, the margarine price emerges at the point X where the margarine supply (Sm) and margarine demand (Dm) intersect in the market, and at this point, q0 margarine is bought and sold at p0 price. At this stage, let the state intervene in the market to reduce margarine prices and set the price as p1. In this case, some of the margarine producers will not find this price sufficient and will either stop production or reduce it.
For this reason, let’s assume that there is a decrease in margarine production and production falls from q0 to q1 (point W). quantity (0q1) is not in a position to meet this demand (W point.) In this case, the demand for q1q2 cannot be met. Taking advantage of the high demand, some sellers start selling the margarine under the counter at a higher price under the counter, thus creating a black market.
The black market actually leads to binary price formation. In the figure above, in addition to the margarines that are sold at the price determined by the government (p1), there are also margarines sold at the price determined in the black market (p2) (point Z.) In fact, the prices other than the p1 price cannot be expected to be at the same level. Each seller can set a price for himself. In this case, many prices may be determined for the same product in the market.