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

Abstract

Price distortions induce the 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. These 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 the economy, establishment or 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. 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. Resource use efficiencies increase if the government restricts its role to ensuring proper functioning of the market and lets prices be determined by the forces of demand and supply. Nevertheless, it is now being increasingly recognised that agricultural price distortions are inherently adverse to the national economy because they stimulate a non-optional transfer of resources out of agriculture when set too low, and putting an excessive burden on consumers when set above world prices. This study shall discuss the price intervention mechanism adopted in Pakistan, then; analyse the effects of distortions of prices and the role of distorted prices in achieving the above mentioned objectives.