In a free economic order, the decisions about economic activities are not taken by the State Authority. It is the market forces which decide which things to produce and in what quantity, which modes should be adopted to produce them and for whom should they be produced. In other words the market forces, that is, forces of supply and demand play ,a decisive role in the spending, production and distribution and exchange of wealth. It is the price index which brings these forces into operation. For instance, in the field of spending, the consumer will prefer to buy goods from the seller who charges comparatively low price provided that the goods conform to the normal standard. In the production ...view middle of the document...
* The idea of consumer sovereignty - consumers have the power to determine what is bought and sold in the market.
* The freedoms of choice, property and enterprise can only be fulfilled in a system with operation of the price mechanism.
* Prices are as low as possible and resources go to the most efficient use.
* The system operates without regulation.
Disadvantages of the price mechanism
* Inequality of income and wealth
* Without government intervention, there will be under-provision of public and merit good
* Wastage on advertising etc.
The alternative to using the price mechanism is a planned economy (such as those under communism).
Lack Of Perfect Competetion
The reasons offered for price control in the free market economies are usually
dichotomized into normal-time and emergency (Galbraith, 1952:28-51). While the
former is argued for preventive and corrective measures, the latter is for achieving the
objective of resource mobilization and distribution in wartime or in the event of natural
calamities. For the purpose of this study we will not need to review the entire spectrum
of the literature in view. It will suffice to analyze that aspect of it that deals with
imperfect markets and the market failure.
The markets we seek to examine here include monopolies, quasimonopoly,
duopoly and oligopoly. Wide-ranging arguments were given by economists in favour of
price control under these market structures.
(i) Monopoly: Ordinary and Natural
In the strictest sense, the term monopoly designates a market where there is only
one seller of a commodity for which there is no close substitute. This is sometimes
referred to as ‘absolute monopoly’. Economists like Lipsey (1971:255) argue that this
type of monopoly is usually perpetrated by force or by threat. Potential competitors can
be intimidated by possibilities ranging from sabotage to a price war. This means that
the general public is held at ransom by a single seller who dictates the market price.
A number of methods were employed to check excessive monopoly powers. In the
United States, for example, Sherman Act of 1890 outlawed monopolistic practices
(Samuelson, 1973;523-4). Also in India, Monopolies and Restrictive Trade Practice
Act of 1969 is intended to curb the concentration of economic power and to check
monopolistic and restrictive trade practices by dominant enterprises (Kumar,
Two distinct concepts - economies of scale and economies of scope - developed in
economic literature. While the former is as old as utility theory, the latter is only of
recent origin (Panzar & Willig, 1981). To determine which is the most efficient among
a group of competing firms, economists traditionally tested for the existence of scale
economies in the firm’s cost functions; and to ascertain scope...