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Real World Examples Of Price Ceiling Economics Essay

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Published: Mon, 5 Dec 2016

The President of the Philippines, Arroyo placed the entire nation under a state of calamity on 2 October 2009 which is a week after tropical storm “Ondoy”, and a day before super typhoon “Pepeng” began. The onslaught of typhoons Ondoy and Pepeng smashed up many parts of Philippines, caused over P30billion in damage and claimed nearly a thousand lives, primarily Metro Manila and north Luzon provinces. Despite devastation of typhoons, several oil companies raised oil prices which prompted public protests and criticisms and set off more than the common grumbling from consumers. With millions of Filipinos still suffering from the effects of those typhoons, the corporations were criticized as greedy, heartless and predatory. Royal Dutch Shell, Petron and Chevron (known here under the brand Caltex) increased the prices of diesel by 2pesos per-liter , or 4 cents, an increase of about 6.7 percent. Gasoline prices went up 1.25 pesos a liter, or 4.74 pesos a gallon, and kerosene by 1.50 pesos. According to the Ibon Foundation, an independent economic research group, the increases were the biggest of the year. The companies insist the increases reflect world oil prices. After Ondoy and typhoon “Pepeng” have left the country for some time, the entry of new typhoon “Ramil” make the imposition of price ceiling more necessary.

To protect public interest, the government enforced a fuel price ceiling to prevent predatory pricing, unreasonable pricing and to lessen the adversities caused by those calamities by temporarily imposing price ceiling on oil. The president, through the EO, ordered the joint Department of Justice (DOE) task force to institute complaints against the violators of the EO as well as the provisions of RA 8479. President Arroyo revoked Executive Order 839 on the Philippines’ main island of Luzon, which kept the level of the price of petroleum products prevailing on 15 October 2009. The announcement was made after she met with Cabinet secretaries and representatives from the oil firms and transport sectors.

Before the EO was issued, the President ordered a study of how to include petroleum products under price control, considering that fuel is an important product used by almost all consumers. Before revoking the edict, Arroyo sought petroleum companies’ assurance that they would continue to provide fuel discounts to transport groups for the next six months to keep fares down. Arroyo also proposed that dealers of liquefied petroleum gas (LPG) can stagger their price over the Christmas season so consumers won’t too harshly affect by increasing price. The Palace further pointed out it was based on the EO is Section 14 (e) of Republic Act 8479 or the Oil Industry Deregulation Law, which states that: “In times of national emergency, when the public interest so requires, the DOE may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any person or entity engaged in the industry.”The EO took effect immediately upon its publication in a newspaper the next day.

Reaction

Many consumers and few companies praised the president’s decision because the imposition could help millions of Filipinos recover from those calamities moreover the changes in price when price ceiling was imposed was an insensitive move to the oil companies.

Economists said the unprecedented interference could scare investors away from the country. The Joint Foreign Chambers, a collection of chambers of commerce whose members include major oil firms, argued in their letter that a price cap in the northern Philippines would lead to lower fuel imports, shortages and a black market. The order has prompted oil companies to warn of a shortage since they may be forced to sell their products at a loss if global fuel costs rise. It is because the oil prices are tied to world markets and the companies would think twice about importing more oil. Petron Corp., the Philippines’ largest oil company predicted that it may lose up to P1.5 billion pesos, or $32 million, in its fourth quarter for the last three months of the year since the executive order may force it to sell at a loss. Some people compelled the government to increase the price freezes nationwide especially because the price of oil in the Visayas and Mindanao ,which are the two other main island, are 5 to 7 pesos more expensive than price in Luzon.

The companies have insisted that their prices are determined by the world market and did not prosecute for predatory pricing. However, because of the increasing of price all at once and the companies refused to open their books, suspicion has grown among the public. To comply with EO 839, oil firms reverted to prices before 19 October 2009. Most oil firms raised prices by P2.00 per liter for diesel, P0.85 per liter for regular, P1.50 per liter for kerosene and P1.25-1.50 per liter for fuel.

Consequences

MAP said that with the imposition of the order, the government is breaking its promise to provide oil investors stability and protection under the law and the government should subsidize the products.

On 2 November 2009, foreign and local businessmen demanded the termination of President Arroyo’s Executive Order 839, to lessen the adverse influence of loses on the petroleum, risk of future stock products, and hindrance to future and appearance of black market.

In a statement, the Joint Foreign Chambers (JFC) said oil supply in Luzon, which accounts for 80 percent of the country’s petroleum market, will be reduced because importers will not sell at a loss.

EO 389 will not really help the most needy of typhoon victims. It is because the poorest income groups are not consumers of petroleum products. This happens because the government is not clear what products they usually purchased and then imposed price ceiling on oil that provide low reconstruction and rehabilitation.

Reports on fuel supply shortage coupled with spiking fuel prices brought fears to Cebuano consumers that these might create a negative impact towards the prices of other commodities.

However, the price monitoring report of the Department of Trade and Industry showed that prices of goods in the market have not posted alarming changes because of the fuel supply shortage.

Oil firms warned that more serious fuel supply shortage in less than two weeks from 11 November 2009 if the freeze on petroleum prices stays.13 days after that day they would run out of finished product stock. The big oil firms did not face any real financial difficulties or bankruptcy as they have over a decade of overpricing and accumulated super profits.

How to settle the problem

Government responded that the DOE and the oil companies must open their books and show the public that all the negative things attributed to them are just misperceptions because even though the price of crude has gone up to $80, the increase should not be affected immediately at least not until after 45 days.

On 4 November 2009, Deputy presidential spokesperson Lorelei Fajardo said the price freeze would remain in effect for the duration of the state of calamity in Luzon based on the recommendation of Justice Secretary Agnes Devanadera. This was emphasized by deputy presidential spokesman Lorelei Fajardo on 2 November 2009 after the Joint Foreign Chambers (JFC) asked the termination date of Executive Order 839.However price caps can only be imposed for a maximum 60 days ,the imposition will be lifted sooner or later.

The government opened to selective implementation of the oil price freeze after weeks of protests and warnings of a fuel supply crisis. Petron has agreed to open its books and the government hoped that the rest of the industry, especially the Big 3, would also be this transparent.

Meanwhile, MalacaƱang said that the Energy Regulatory Commission (ERC) and the Dept. of Energy (DOE) will study proposals about price freezing as the ERC and DOE are in the best position to determine the merits of this proposal because they are aware of the factors involved in the incident.

President Arroyo announced her decision on13 November 2009 at the end of an emergency meeting at MalacaƱang with representatives of oil companies as well as officials of labor and transport and ordered the lifting of the price freeze on petroleum products and basic commodities in Luzon, which was still officially under a state of calamity, effective on 15 November 2009.This decision was made after making oil firms and traders promise to recoup their losses on a staggered basis, stabilize prices and supply of products ,put in more investments for the poor to spur economic activity and create jobs and provide some form of subsidy or discount in selected areas, especially those affected by the calamities.

The bottom line is to remain the same in the next six months, assuming that world markets remain stable. If international pump prices become very high, then the government can review this policy.

Most of the corporations committed to hold the price for at least six months.

It was agreed during the meeting that details of the price adjustments and subsidies would be finalized over the weekend.

The DOE (Department of Energy) and the oil firms are given the weekend to go back to the drawing board and make their calculation or formula (on the price increase).

Mrs. Arroyo also instructed Favila and Energy Secretary Angelo Reyes to help transport groups set up a consortium that would allow them to directly import fuel.

Favila said the National Development Corp. and the Philippine International Trading Corp., both government corporations, will help put up capital for the venture.

The oil companies welcomed the move and have agreed not to increase their prices on a one-time basis. Earlier estimates showed that consumers may have to bear P4.50 to P5 per liter increase in pump prices once the EO is lifted.

As to how much the first increase in price on 15 November 2009 depended on competitive forces. According to Martinez, the P1-billion fund which was earlier set aside by the government to assist the transport group in conversion to LPG may also be tapped to help cushion the impact of the expected surge in oil prices in the next few weeks.

Martinez suggested that assistance or subsidy could come in the form of discount coupons for legitimate transport groups. The oil firms as well as manufacturers and traders agreed to his proposal to reduce prices in areas that continue to suffer from the effects of the storms.

On 16 November 2009,President Gloria Macapagal Arroyo said that the government will not hesitate to re-impose the freeze on fuel prices in Luzon if oil companies will renege on their promise to stagger increases in the prices of their products. The oil companies, manufacturers and traders are fully aware that the government can again impose price controls.

Drugs price control in Canada

Government in Canada have imposed price controls on prescription medicine for many years for its citizens .Through this intention ,the affordable of Canadian citizens in purchasing the necessary drugs they need can be ensured .To achieve the efficiency in drug prices control ,several mechanisms have been instituted to control drug prices .These includes the establishment of a semi judicial by the federal government to control drug prices and several measurements to regulate the drug prices at the provincial level ,for instance ,formulary management ,use of generics ,reference-based pricing ,price control of patented medicine ,price freezes ,reimbursement rates ,cost sharing arrangements and limits on markups .These measurement have make effectiveness price control to a large range .

Patented Medicines Prices Review Board (PMPRM) ,a federal quasi- judicial agency established under the Patent Act in 1987 to regulate drug prices .This agency take responsibility to control price of patented medicines only .The PMPRM was intended to avoid and prevent the prices of patented drug reach excessive which might result from manufactures’ new right to market exclusivity .Hence ,certain guidelines are used by PMPRB in determining the excessiveness of a drug price :

The cost of therapy of new patented drugs must make sure not exceed the highest cost of therapy and in the range of existing drugs used to treat the same disease .

Manufactures can charge the breakthrough drugs and those that offer a substantial improvement to the median of prices charges of the same drug in other specified countries which are United State ,United Kingdom ,Switzerland ,Sweden ,Italy ,France and Germany to ensuring that Canadian prices are not highest in the world .

The increases of prices of existing patented drug cannot exceed the Consumer Price Index .

The PMPRB gains control over the pricing of the drug once the drug accepts a patent of any sort and also review the drug’s price when it was initially marketed . A company that consider out of compliance with the guidelines by the PMPRB must reduce the price .Moreover ,any excess revenue that have earned by that company from sales of the drugs will be relinquished and can order the repayment of the excess revenue of the company to the federal government .

Purpose

Federal price controls on patented drugs is to avoid brand-name companies from reducing prices on these products once a patent expires .The highest price of the exisying drugs in the same therapeutic class is take as a reference by Canada’s Price-Control Policy .This is done to establish the maximum allowable for new patent-protected drug formulations entering the market .As a result ,due to fearness of makers of brand-name drugs of unintentionally lowering the maximum allowable entry price for new drugs in the same class ,the makers of brand-name drugs will reluctantly reduce the price of the original drug when it goes off-patent .An artificial incentive is created by Canadian price controls to resist competing for brand-name companies on the basis of price with generic firms for sales of off-patent drugs .

Consequences of Drug Prices Control

Although government of Canada have imposed drug price control system to ensure the prices of drugs are under control ,however ,cannot deny that ,the drug price control system also result in consequences .

Price- controlled system of Canadian bureaucracy indirectly lead to decrease in producing fewer new drugs Canadians are often forced to wait to a year for more advanced medicines .As a result ,Canadians are routinely denied access to newer and better medicines ,and often travel to America to purchase them .

Moreover,price discrimination is one of the consequences of drug price control .Drug companies and industry often engaging in price discrimination by charging the different buyers for different prices of the same product .Drug companies are prefer to sell the drugs for less in Canada and elsewhere only .This phenomena is happen due to the drug companies can sell for more in the United States.

In addition ,the expensive development of drugs and moderately cheap to manufacture will indirectly lead to price discrimination works in the drug industry .Price discrimination causes drug companies in Canada to charge high prices of the same product of drugs in United States. Hence, companies can recoup their research & development costs .Besides that, companies can make a profit in Canada and elsewhere by simply covering the cost of making the pill as long as the research & development cost of companies can recoup.

Further ,price controls make investing in research & development less attractive .This is the result of the continuing of rising in costs and risks involved in developing new drugs .With extra risks and uncertainties ,companies never being sure of the selling prices of their future drugs and even find themselves having to reimburse sizable sums . For example, Schering Canada Inc. had to reimburse $7.8 million in 2003 because it charged a price judged as excessive for its infliximab (Remicade) drug.

Price control causes a direct reduction in volume .Due to this ,a declining number of research & development missions are obtaining by Canadian subsidiaries .As a result ,pharmaceutical innovation is indirectly become slower ,and lead to a remarkable drop in pharmaceutical research & development .A decline of pharmaceutical research in Canada would hit Quebec hardest ,which is the home to Canada’s largest concentration of pharmaceutical research & development ,with 42.3% of total spending in2002.However there other major costs linked to drug price controls ,these include losses of highly skilled jobs ,corporate research centers and jobs forgone in the subcontracting of goods and services and in industries associated with research & development .

Downward pressure on the prices of older patented drugs and non-patented drugs since distortions caused by price controls would cease to exist . Pharmaceutical firms eliminate incentives to lower the prices of drugs already on the market is result from price control .As a consequence ,some generic drugs are more expensive in Canada .In order to fully recovery of research & development ,launch and marketing costs ,companies tend to keep these prices higher .This condition will also lead to a higher selling prices of the goods by generic drug producers .

Last but not least ,drug price control will lead to lower rates of substitution of generic versions of drugs by consumers in Canada for their brand name originals drugs .The possibility of price competition between off-patent ,brand-name drugs and generics altogether is eliminated by the public policies forcing substitution of generics .Generic companies no longer have to compete on price against consumer loyalties toward brand-name drugs when forcing generic substitution for brand-name drugs is done by government .As a result ,consumer need to purchase the drug at higher price due to the absence of alternative products .


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