Punjab fixed sugar’s price at Rs85 per kg, prompting advice from the competition commission of Pakistan [CCP], which stepped in to remind the provincial government that it was violating the Competition Act 2010 passed by the Parliament.
“The Commission by virtue of its mandate is compelled to caution (against) and explain unintended consequences of putting a price ceiling,” says a policy note issued by the CCP immediately after Punjab’s decision. “The law clearly prohibits capping the price and charges all stakeholders to promote competition in the market.”
Price controls have been a popular measure with governments worldwide, including Pakistan. They, however, have distortionary effects on the market — on demand (consumer) and supply (farmers and millers) sides — and entail economic and administrative costs that are harmful in the long run and outweigh the short-term benefits.
In the past, fixing the price at Rs40 per kg pushed at high as Rs100 per kg.
“Rather than price ceilings, the deregulation of the sugar market would be a better and sustainable option to promote free trade mechanisms where price signals can be effectively conveyed to all stakeholders to attract investment, increase competitiveness and reduce distortions in local supply,”
The report suggests that price controls “rarely work and fail to protect intended beneficiaries”. The negative implications, short- and long-term and direct and indirect, far exceed their benefits. As Punjab is the only province to set a price ceiling, one of the effects could be that sugar moves to other provinces where no price ceiling exists and can command a higher price. It could also encourage hoarding by suppliers or impulsive buying by consumers which will likely result in a shortage in the market. The shortage can directly affect price and consumers may end up paying even more.
On the production side, mills do not operate at an equivalent level of efficiency. Factors such as economies of scale, labor, equipment productivity, and access to crop vary between different mills and give some mills a competitive advantage over others. Thus, it may not be possible for all of them to produce sugar at the same cost. Imposing the maximum retail price could mean that some mills, which purchase cane at the minimum support price as fixed by the government, may not break even.