Price control, fare control and tax decontrol

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Bienvenido S. Oplas, Jr.-125

My Cup Of Liberty

“If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Ronald Reagan, former US President

There are many price interventions by the government, proposed or already implemented, that set a cap or ceiling price. Like drug price control, fare surge control for transport network vehicle services (TNVS), electricity price control via primary and secondary price cap in WESM, housing rent control. Or a floor price like mandatory minimum wage and minimum fare for jeepneys and buses.

There are also indirect forms of price control like mandatory discounts for senior citizens and students. Rich or poor, they get the obligatory and forced discounts for things such as meals in restaurants and airline tickets.

The price distortion can be represented by the graph below. If there are no laws on mandatory price interventions, the market price (P mkt) and market quantity (Q mkt) will be at point A where supply meets demand.

To simplify, we assume here that consumers’ demand curve (downward sloping, lower price will lead to more quantity desired) will not move up or down, only the supply curve (upward sloping, lower price will lead to less quantity produced) will adjust.

Price control (P con), fare surge control, rent control will bring artificial lower price and formal businesses respond by reducing the supply curve to the left resulting in lower quantity (Q con) and consumer diswelfare.

Similarly, lots of taxes, old and new will raise the price of commodities and services (P tax). Like the recent higher oil tax, coal tax, sugar tax, tobacco tax under the TRAIN law. Government’s tax decontrol has a similar distortionary effect on market pricing (see graph).

Price control adversely affects the supply decision of formal businesses while encouraging the supply of informal, illegal, illicit businesses. Fare control and surge control will lead to lower quantity by legal TNVS and illegal transpo, and “colorum” vehicles fill the supply gap.

Higher prices via more taxes also distort pricing and supply. Higher tobacco and alcohol taxes for legal companies result in higher prices. Illicit, smuggled tobacco and alcohol come in because consumers want cheaper products.

Mandatory fare discounts for senior citizens, persons with disabilities (PWDs) and students in airlines, shipping lines, bus lines, TNVS, etc. will lead to demand distortion. Poor oldies and students will not fly often despite the 20% mandatory discount because they are poor; it is the richer oldies and students who will fly often. And this will lead to higher overall fares since the reduced price must be compensated for by non-senior citizens and non-students.

The best price regulator toward lower prices and/or improved quality of goods and services is more market competition, not more government price intervention.

Aside from price control, government should also stop or minimize supply control of various services and players. More supply of TNVS cars and drivers, more airplanes and boats from existing airlines and shipping lines, more competing players, will help bring down prices and fares.

Finally, government should stop or minimize its tax decontrol itch and minimize fanning, if not creating, crisis stories – climate crisis, garbage crisis, plastic pollution crisis, tobacco/alcohol/NCD crisis, sugar and obesity crisis, inequality crisis, and so on. Anywhere in the world, people are living longer and healthier as shown by rising life expectancy. Proposals like higher sugar tax, plastic tax, sodium tax are based on alarmism, not health and environment realism.

 

Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers.

minimalgovernment@gmail.com





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