Economic Analysis of the Effects of Rice Price Distortions in Pakistan: 1975-90

Nuzhat Iqbal


Price distortions induce inefficient utilisation of resources
by giving incorrect signals to producers and consumers. Since distorted
prices do not reflect the real value of resources, quantities of goods
and services produced may not be consistent with their demand. The price
Distortions may be caused by a number of different reasons. They may,
for instance, be caused by monopolistic tendencies, preferential
treatment of a particular sector of economy, establishment of diffusion
of a particular product or an input, etc. In fact, price distortions
occur sometimes from deliberate and sometime inadvertent Government
policies of subsidies and price supports in pursuance of certain social
or economic objectives. Both producers and consumers maximise their
economic welfare by allocating their resources in response to price
signals from a fully comPetitive market. Since movements in commodity
prices especially food prices affect producers and consumers in exactly
the opposite way, fixation of their prices in developing countries
represents a policy dilemma. While prices of all items used by consumers
and .producers are iml?ortant, food prices carry a unique significance
in low income countries where the marginal propensity to consume is very
high. Since farm producers are also food consumers, the net impact of a
food price change in their case will depend on the extent to which they
have emerged from a subsistence economy. However, if inputs are subject
to price fixation, the impact will be felt more readily and directly. In
fact, where there is no Government intervention, prices equilibrate
consumer demand with the productive capacities of producers. If prices
are distorted by any agency~ their allocative role is seriously
diminished. Imperfections of both size and operation being prevailed
ultimately induce misallocation of resources in the country. Resource
use efficiencies increase, if government restricts its role to ensuring
proper functioning of the market and lets the prices to be determined by
the forces of demand and supply.

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