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Are Price Controls Necessarily Bad? The Case of Vietnam

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Abstract

Most economists’ instinctive reaction to price controls is that they are harmful. If enforced, they result in shortages and resource misallocation. With weak enforcement they often result in black markets, and high transaction costs. In this paper we assess the pros and cons of rice price controls in Vietnam given these instincts. We argue that these price controls fix producer prices and allow government marketing agencies to sell at higher prices and hence are, in part, a revenue raising device. As such they may be part of an efficient tax mix, particularly so since agricultural incomes and production go untaxed under the formal tax system. We also argue that such controls can act to dampen costly domestic adjustments in the face of volatile world prices. We develop a multi sector multi household general equilibrium model to numerically analyse the consequences of these price controls, and show that this system can be supported as welfare enhancing under conditions which currently prevail in the Vietnamese economy. The case against price controls may hold in other circumstances, but in this case the arguments seem to be more nuanced.

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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20021.

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Date of creation: Feb 2002
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Handle: RePEc:uwo:uwowop:20021

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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Keywords: Price controls; General Equilibrium; Tax-mix; Rice; Vietnam;

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  1. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  2. Dawkins, Christina & Whalley, John, 1997. "Tax Structure and Revenue Instability under External Shocks: Some General Equilibrium Calculations for Cote d'Ivoire," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 23-33, February.
  3. Servaas Storm, 1999. "Foodgrain price stabilisation in an open economy: A CGE analysis of variable trade levies for India," Journal of Development Studies, Taylor & Francis Journals, vol. 36(2), pages 136-159.
  4. Nicholas Minot & Francesco Goletti, 1998. "Export Liberalization and Household Welfare: The Case of Rice in Vietnam," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 738-749.
  5. Deaton, Angus, 1989. "Rice Prices and Income Distribution in Thailand: A Non-parametric Analysis," Economic Journal, Royal Economic Society, vol. 99(395), pages 1-37, Supplemen.
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