Set Price Ceilings to Solve Commodity Prices: Bobi Wine is Right on this, and Here is Why and How!

I woke up to a beautiful article in Daily Monitor about Bobi Wine asking the Government to set price ceiling for fuel in order to control commodity prices, and make our lives a little livable! Well, the article is simply a narration or report, and I will offer you the analysis that it misses! In this short article, I am gonna explain why Bobi Wine is right on this. Additionally, I will make my comment on other suggestions like tax reductions, printing and injecting in new money, and reduced extravagancy within government corridors.

READ THIS: A summary of African Youth’s Problems in just 4 points!

Price ceilings and control of commodity prices

Investopedia defines price ceiling as ‘the mandated maximum amount a seller is allowed to charge for a product or service’. This is clear, isn’t it? Well, that’s it! This can save consumers, especially if prices of a certain consumable and basic need was too high to be managed by commoners. In terms of reducing the price of that targeted commodity, price ceilings work! The question is, can’t suppliers find other ways to recover what we have stopped them from getting? Trickier, right? We will come back to this!

As you can see, this principle or law isn’t a pleasing one, especially to business owners (or suppliers) and some economists (whether they are consumers or suppliers). But wait! Life has thought about them too; there is what is called price floor, which is kind of the opposite.

For price floor, the law or government sets the minimum price below which suppliers shouldn’t give out a product! While this may seem to protect suppliers or producers more, in reality, these two principles work hand in hand for fairly everyone’s good! We won’t go deeper into this. Let us get back to what brought us here; price ceilings!

Okay, if the government sets price ceiling for a commodity, for example, fuel, it means no fuel dealer or company should sell above that price! You can’t set price ceilings for many things at ago. First, it would be hard to manage or supervise your order. Secondly, it may be detrimental to economy. Thirdly, you don’t need to, for in most cases one or two commodities can have impact on almost everything else!

In our case, controlling fuel prices can determine transport fares, which in turn can lead to reduction in prices of many commodities and services that rely on transport. You see? Almost everything! Of course, there are many more other factors to consider when selecting a commodity to ‘attack’, for example, profits made in the industry. Mark this point (profits), for I will come back to it. And it is the basis of my whole argument!

READ THIS TOO: A story of Tuloe who returned lost 50,000USD to the owner!

Why price ceiling is an answer, and is never as bad as most economists or business owners would like us to believe!

Do you remember where I noted that it is possible for suppliers or producers to actually recover what you have deducted from prices using other means? Well, it is one sure reason why ceiling may not work, at least not for long.

According to Investment and finance author, Troy Segal, producers and suppliers may learn to recover their ‘extras’ by charging for other goods and services they used not to charge for along the product’s supply chain or charge highly for those services and goods that aid the production and supply of the targeted product or shift the burden to an entirely new or related product. For example, fuel companies might increase prices for oil or lubricants, gas, and their other products.

They can as well decide to lower the quality of the product, thereby minimizing their costs of production, and maintaining their profits. Lastly, they may as well reduce or stop the supply of that commodity, and re-invest their money in something else, the other thing the government hasn’t touched!

About the last point, we need to revisit the law of demand and supply. According to the law of demand and supply, if the price is set, demand is likely to beat supply. Why? Because many people will now afford the commodity and go for it, and overwhelm the supply. At the same time, the supplier who is no longer making as much as he used to might decide to invest less in the product or stop supplying it altogether, making the product less available, and creating ‘pseudo‘ increased demand!

However, as you must have already noticed, the failures noted above aren’t inherent in the principle itself, but in the people, the suppliers and consumers. If everyone stayed true to the principle, it would work. The principle is okay, but people are failing it!

What do I mean?

The charging or charging highly on other elements of the product that the supplier used not to charge for, the reduction in quality, and the reduced or stopped supply aren’t a necessary or automatic or inevitable repercussions of price ceiling but just urges and greed engraved deeply in capitalistic businesses! Control or punish the greed, and you have price ceiling working!

NB: There are better ways to put businesses in line without necessarily going brutal! We will discuss these issues some other day!

Price ceiling works, and can even work for a long period of time, but capitalistic economists, businesses, and governments wouldn’t want that! Here is why!

Do you remember when I said you you should note the point on profits? Well, let’s revisit it!

REA D THIS TOO: What I learnt when I attended World Bank Youth Summit

The longing for profits and price ceiling: Explanation for perceived failure of price ceiling in controlling price, and maintaining economy!

I think all economists and businesses agree that, yeah, price ceiling may successfully control a product’s price and make it affordable for masses. Some more optimistic ones go ahead and agree that the government can even in some cases manage to supervise businesses and ensure that no price re-channeling is done through charging or over-charging of ‘extras’, quality reductions, or supply reductions. However, what most don’t accept is that price ceiling (or simply fixing a price of a commodity and refuse it to go as higher as it wishes to be or as it should be in reaction to supply and demand) can be any good to economy.

However, it is due to businesses’ obsession with profits that price ceiling fails!

What are profits? To be more specific, what is net profit? Well, net profit is the money your business is left with after you have met all your costs, including taxes, and many of your hidden costs. In other words, it is ideally money beyond your everything; it is surplus!

Ideally, you don’t actually need this money (of course you do!) because your business doesn’t depend on it! Your business can move on for years without this money since you are able to buy supplies, pay workers, maintain machines, do repairs, etc.

However, practically, you need this money for business growth (for example, setting up another branch, or improving on your machinery and anything else, increasing salaries or paying more allowances or just taking some to the beach in Entebbe or Dubai). The point is you can do these things, but if conditions demanded that you don’t do them, you can still survive, and for long! Are you with me? This is the essence of non-profit businesses; even the profit they make is re-invested, and roughly counted as an expense!

And that isn’t it all! What? Yes, in this first instance, you can actually be with zero net-profit, and still live on! Now, consider this second option; living on, not with zero net-profit, but some net-profit, probably above 50% of what you used to make! That is what price ceiling would achieve in most scenarios! Who wouldn’t manage to live with about 60% of the net-profit he used to make? Only the greedy ones, the capitalists!

Abnormal profits and hard times!

In strongly believe that capitalistic businesses don’t increase commodity prices as a means to survive. On contrary, they do it to just maintain profits and/or get more profits, the abnormal profits! Tell me, have you realized that when a commodity’s price is high and demand is high, producers or suppliers usually make a lot of profits. The secret isn’t in selling too much and making too much of the usual profit, but in over-hiking and exploiting the situation for someone’s greed!

Take an example, if we increased the price of fuel by one unit, a transport company is likely to increase its fare by 10 units in the name of ‘fuel price has risen’. I know you know these things! So, where is economics here? Isn’t this just robbery?

Assuming that fuel dealers or businesses usually make double or triple the total costs in terms of their net-profit, what is wrong with halving that net-profit or just reduce it by 40% to accommodate the hard times and make their products affordable? And why can’t this be as long as it takes to go back to normal? What is wrong with sacrificing a part of profits, which profits you didn’t need to survive in the first place?

It is the greed, obsession, and slavery to ‘lucrative profits’ that make this sacrifice impossible! Otherwise, any local economy can shield its people for long irrespective of what is happening globally. Of course, the idea is to keep within the ranges that don’t lead to negative net-profit or a very minute percentage that could make a business fall into a trap! And this safe gap is easy to work out! I mean, businesses out here, including fuel companies are making abnormal profits, what’s hard in foregoing the profits, just for now?

NB: Other profit-obsessed businesses include, real estate, banking sector, and technological or digital companies.

Cutting taxes, Printing new money, Reduced Government Expenditure, & economy!

Printing new money is kind of stupid! We won’t debate about it! When you print money, you can confuse people with the burst of it on streets momentarily, but because that money isn’t backed up by anything like goods and services, it will simply lead to inflation later! Printing new money is one of the stupidest actions governments take. Author Miltmore says that one sure reason we have inflation now is because the US government printed a lot of dollars into economy few days ago!

Surely, even a fool can see why printing money is just a political action!

Cutting taxes may not be good too (it may be good for a country like Uganda where tax is misused). Just like price ceilings, tax cuts are rarely real! Government cuts here, and increases there. No cuts. Additionally, tax cuts don’t necessarily reach the common man. As we have already explored, capitalists have no soul! If taxes are cut, they take use of the advantage to make more profits. Taxes weaves, breaks, and cuts benefit the rich, more than they do the common man. In a very sober country where corruption is less, tax, even high tax would be great!

Otherwise, no need to cut taxes. In other words, government might lose a lot of money in tax breaks and yet suppliers or producers aren’t reducing their charges as per reductions in taxes. Lastly, tax is important to a ‘functioning’ government; it is essential!

If the worst came to the worst, and cutting tax becomes inevitable, I would suggest a cut on only locally made goods and services.

Even if it wasn’t about any economic war, it is always a good thing for government to cut taxes on local producers, which would encourage local economy and entrepreneurship. Actually, local entrepreneurs deserve tax breaks as well. This is not dangerous since they would later become tax payers if they succeed. Additionally, government makes money in other ways as local production gets promoted! I would strongly advise against tax cuts on big issues like fuel, and other huge imports!

For locally made products and services (and also locally owned; don’t cut on tax on a business that sends its money back to some other foreign country), tax cuts could help a little!

About reducing government expenditure, yes, Uganda must! In controlling inflation, government’s reduced expenditure reduces money from circulation! And expenditure increases money in circulation! However, these arguments make sense with a sensible government! What do I mean? Take an example of Among’s new 2.8 billion cars! Such expenditure is wastage! But spending on infrastructure, and other job-creating projects empowers masses to give back to the government!

So, yeah, Uganda should reduce on its expenditure simply because it is bad expenditure!

Summary on Price Ceiling!

It is good. It can work. Do it. Set price ceiling on fuel and maybe one or two other lucrative sectors! Uganda will rise again! And, yeah, stop spending on senseless things like vacations, cars, and parties, and, yeah, leave taxes alone! The economy will balance itself out. And don’t dare print money!