Price ceilings only succeed in creating and making existing shortages worse

On January 30, 2024, Mwananchi published an article titled Sukari yauzwa kama bangi mtaani (sugar is sold in the streets [illegally] like marijuana). It reported that sugar was being sold at a price of up to Sh5,000 per kilogramme. This is way above the indicative price of Sh3,200 set by the government on January 23, 2024. Note that, “indicative price” is a euphemism for price ceiling.

What is happening in the sugar market in Tanzania is the typical impact of a price ceiling. A price ceiling is a maximum legal price set by the government. A price ceiling is usually set below the equilibrium price, that is, the price at which there is a balance between quantity supplied and quantity demanded.

A price ceiling will always cause a shortage unless suppliers are subsidised to increase the supply. Shortages create an underground economy because there are consumers who are willing and able to pay much more than the set price.

From what has been reported in the news, apparently that is what is currently happening in Tanzania regarding sugar. The fact that price ceilings create an underground economy is not a Tanzanian or an African phenomenon – it is a universal one.

Price ceilings are politically popular because they sound fair and even patriotic, as they appear to be a shield to protect consumers from being ripped off by greedy and unscrupulous merchants. However, a price ceiling whose objective is to help people with low incomes can actually end up hurting them because those people may not be able to find the product at the set price or even at what would have been the price in a free market.

Most people in Tanzania today are too young to remember that in the 1970s and 1980s, the Tanzanian Price Commission set price ceilings for hundreds of products and services, purportedly taking into account production and transportation costs and all overhead expenses.

Nonetheless, price ceilings created inferior products and widespread severe shortages where permits, road blocks, and corruption became the norm. The shortage of goods and services turned many political leaders and government departments into allocation agencies.

There is no need to panic. That is not where Tanzania is heading today. However, it is important to be cognizant of that chequered history to make sure it is not repeated. Moreover, price ceilings have a way of spreading over time.

From an economic point of view, price ceilings have the potential to spread because of the linkages between products. Using sugar as an example, it is a final product for individuals and households who may use it in their tea, porridge or household baking.

However, for businesses that produce soft drinks, processed foods, candy, or baked products, sugar is an important input that may constitute a large proportion of the total cost. If these businesses are not able to find sugar at the legal price and thus are forced to buy it in the underground economy at an exorbitant price, they will most likely increase the prices of their final products. This could, in turn, lead to price ceilings on their products. Some people may also hoard sugar for speculative reasons. Price ceilings tend to induce such behaviour, especially if merchants expect that the price ceiling will be changed upward. They may see that the cost of holding inventories is relatively small compared to the potential profits of selling the product in the future.

Market forces cannot be simply be willed or scolded away. A price ceiling that pays little attention to the shortage it creates will, sooner or later, be counterproductive and can even be harmful to the people it was intended to help. Needless to say, there are also some real costs associated with monitoring the adherence to the price control.

Richard E. Mshomba is Professor Emeritus of Economics at La Salle University, Philadelphia, PA 19141, USA. [email protected]