What actions might be taken by governments to reduce or limit price fluctuations - Essay Example

What actions might be taken by governments to reduce or limit price fluctuations of your commodity? Price fluctuations and how it should be mitigated has been the subject of many research studies. However, there is no single agreeable method that has been developed by the existing vast literature, which shows exactly how the problem of price fluctuations can be fully mitigated. The price fluctuation concept is a natural concept, most especially for the seasonally produced goods (FAO, 2011:32). This is owing to the fact that applying the law of demand and supply for example in the [production of agricultural products, there will always be surplus during the harvesting time and low supply during the rest of the seasons. This means that the prices will be lower during harvesting, and then increase sometimes later when the season is far from harvesting. Thus, such seasonality is a natural aspect that the government cannot control. However, the government can intervene to mitigate or at least limit the rates of price fluctuations for the seasonally produced goods, through production planning that would ensure that enough products are generated during the season, which can last through the off-season and sustain the demand for this period, thus keeping the prices relatively constant (FAO, 2011:34). However, while this strategy may seem to be very practical, the limiting factor is the perishability of the products. While bulk production can be done to last through the off-season and sustain the demand, how about the products that are perishable, and that cannot last for a few weeks or months without going bad? This calls for the development of a different strategy to address the price fluctuations. Price fluctuations are caused by a variety of economic factors that are at play at any one given time within an economy. New technologies could emerge that causes production to increase, or even the cost of production to reduce, thus causing a reduction in prices (Powers, 1990:461). Alternatively, substitutes can emerge which may cause the prices of the existing goods to reduce or increase, based on the nature of substitutes created. Seasonal changes in climates and other environmental factors may cause the supply of goods to reduce, thus increasing the prices of the limited commodities supplied (Mathai, 2012:n.p.). These factors create uncertainty in the economy, resulting in the prices changing with every change of the situation. Thus, measures such as importing in order to cover for the deficit in supply, as well as improving the infrastructure to ensure efficient supply throughout the economy, are important strategies that the government can apply to control the possible price hikes (Mattoo, 1990:39). Nevertheless, the major problem associated with such strategies is that they are short-term measures that can help to address the immediate risk of price fluctuations, but are not sustainable for an economy throughout (Powers, 1990:464). This requires the establishment of more robust and future-oriented strategies that can stabilize the prices in the economy. The fundamental cause of price fluctuations is not so much a function of productivity, but rather a function of the expectations that comes with the changes. This being the case, it is only possible to manage price fluctuations, through the application of strategies that will address the expectations. The mitigation of price fluctuations whether for seasonal, perishable and the non-seasonal or non-perishable goods can effectively occur through the government building future expectations (FAO, 2011:32). Building future expectations is a strategy that seeks to implore on the public to control both their borrowing and spending, while at the same time imploring on the financial institutions to control on their lending practices. The government can manage to control inflation effectively through building future expectations, where the government can apply the monetary policies that indicate the possibility of the future being economically strained. This may entail the strict regulation of the lending practices of the financial institutions, while also applying the central bank mechanism to reduce the financial liquidity in the economy, such that the current contract will then be established on the basis of an anticipated difficult financial future (Mathai, 2012:n.p.). This approach entails the use of the central bank to sell large quantities of financial instruments to the markets, and in turn increase the balance sheet of the central bank, while reducing the balance sheet of the financial institutions, and at the same time reducing the quantity of the money circulating in the markets (Mathai, 2012:n.p.). This way, both the short-term and the long-term contract will certainly set the wage levels at certain moderate levels, while limiting the price increase over the entire duration of the contract, to concur with the expectations of a difficult financial future (Mathai, 2012:n.p.). This will help to sustain both the real wages and the real prices of the commodities at moderate levels, which will in turn help to keep the actual inflation low (Mathai, 2012:n.p.). Building expectations is not only suitable for the government to apply in mitigating price fluctuations through using the central bank monetary policy, but also through using other channels such as increasing market information (FAO, 2011:32). Increasing the market information also builds the expectations of the future, since the government can offer information relating to the current production by different sectors of the economy, while offering the projected production levels by such sectors in the recent future. Through this strategy, the government is able to build future expectations both in the public and also the private sector, either to engage in more production or to limit spending, based on the projected future situation (Powers, 1990:463). The relevance of building future expectations as a price fluctuations limiting strategy emanates from the fact that it works towards reducing the incidences of panic-driven price surges (FAO, 2011:32). Through a well-built expectation, the likelihood of sustaining relatively stable prices is high, owing to the fact that the information helps both the public and the private sector to plan on the productivity, while the population plans on the spending of their incomes and savings, based on the expected future conditions. This way, the provision of information enables a smooth transitioning from the high productivity season to the low-productivity seasons and vice versa, without the panic-driven economic shocks that cause unanticipated price surge (FAO, 2011:32). References Food Agricultural Organization (FAO). (2011). Policy options to address price volatility and high prices. The State Of Food Insecurity In The World. 32-43. Mathai, K. (March 28, 2012). Monetary Policy: Stabilizing Prices and Output Finance & Development. International Monetary Fund. February 25, 2015. Accessed: Mattoo, A. R. (1990). Management of price fluctuations. New Delhi: Anmol Publications. Powers, M. J. (1990). Does Futures Trading Reduce Price Fluctuations in the Cash Markets? The American Economic Review 60(3), 460-464 Read More