Essay About Price Stabilization And Price Stability

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Price stabilization, which refers to the control or dampening of the inflation rate is one of
the primary objectives of Philippine government policy. Price stability, as opposed to high
inflation rates or the rapid increase in the general price level of goods and services, has been
shown to be conducive to long run and sustainable growth of the economy. On the other hand, a
rapid rise and wide fluctuation in price levels is considered undesirable both on the part of
consumers and producers.
Policymakers in general have several ways to stabilize prices. One is through price
control measures such as setting ceiling prices. The other way is through non-price control
measures such as productivity improvement programs and increased investments in
infrastructure and other supporting services. The government may likewise use monetary
policies such as increasing its reserve requirement for banks to siphon off excess liquidity to
control inflation.
In the past, price controls were imposed to restrain the rapid rise in the prices of basic
commodities such as rice, corn, sugar, cement, fertilizer, etc. Price controls have been shown,
however, to result to distortions in production, resulting to inefficiencies and welfare losses. The
government ends up defending and supporting floor and ceiling prices using limited resources
and in effect sending wrong signals to industry. Price control policies have the direct effect on
transferring wealth to individual producers while transferring risk in the opposite direction. It
redistributes wealth and risk within the system, distorting the traditional market free signal
mechanism.
Rausser, et. al. (1982) documented the distortions arising from government instruments
on both domestic and industrial agricultural systems. For instance, the introduction of a ceiling
or floor price means that at this price, the social marginal costs of producing each level of output
will no longer be equal to the social marginal benefits. The payment of a subsidy to importers of
a commodity to cover the