There are two pricing methods. It all depends on the type of economic system within which the state functions. Directive pricing is typical for countries with a planned economy. In this case, the market has practically no effect on the situation. Prices can be determined even before the direct release of products. A different situation is observed with the market method. In this case, prices are determined not at the enterprise, but under the influence of supply and demand when selling products on the market. We’ll talk more about this in today's article.
Find out what directive pricing means
The state may directly or indirectly influence market conditions. Various economic theories see the role of the state in managing the national economy in different ways. Free pricing is the basis of a market management system. It was justified by all classical economic theories. It is believed that the need for government intervention in business processes was argued for the first time by John Maynard Keynes. Fully directive pricing is the prerogative of a planned economy. In this case, the cost of the products is determined at the stage of its production or even earlier. Price limits, profitability standards, and coefficients of possible changes can be set. Today, in many countries with a market economy, one or another means of intervention is used in the economy.
In classical theories
The attitude to the role of the state has changed dramatically several times throughout the history we know. At the turn of the 17-18 centuries during the emergence of modern market relations, the dominant doctrine was mercantilism. It was believed that the national economy could not function effectively without government intervention. However, after two hundred years, this doctrine was replaced by the ideas of so-called economic liberalism. His apologists were Adam Smith and David Ricardo. They said that the market is a self-regulatory system, directive pricing for it unnecessarily. It is based on the “invisible hand” - personal enrichment interests.
However, World War I and the ensuing Great Depression forced scientists to reconsider their views on pricing. Already in the 1930s, special laws were adopted that expanded the scope of state intervention in the national economy. Directive pricing of certain product categories has become commonplace.
Keynesian economics
After the Great Depression, many developed countries abandoned the idea of market self-regulation and began to intervene in business processes. Keynes argued for the need to increase budget spending and lower interest rates during recessions. Demand creates supply, and not vice versa, as the classics claimed. Neo-Keynesians advocate market and policy pricing in symbiosis. They adapted some of the ideas of the classics and believe that state intervention is necessary only in the short term. This is due to the fact that the situation cannot be quickly reconstructed in order to “cure” the economy of the negative consequences of a decrease in business activity. However, neo-Keynesians believe that in the long run, the market is a self-regulatory system.
Ways of influence
There are two methods of state regulation of prices: direct (directive) and indirect (economic). The first includes:
- Fixing prices. For example, the state, at its discretion, may set tariffs for transportation or funeral services.
- Price limit. A state may introduce a maximum or minimum limit.
- Establishment of marginal price change ratios. For example, such a system is often used in calculating telephone tariffs by consumer category.
- Establishment of maximum sizes of trade allowances. This is how prices for essential commodities, medicines and some food products are regulated.
- Establishment of profitability. This means that a certain rate of profit is immediately included in the price. For example, the fee for using containers is often set immediately, taking into account the 25% profitability of this type of transportation.
- Establishment of guaranteed prices. This system often operates in the field of agriculture. Prices are set by special government agencies. They apply to purchases even when the real market value of the goods is lower.
Price declaration is the process of reviewing state-regulated prices. To do this, you must submit an application to special state bodies with an economic justification for the request.
Economic methods of regulation include subsidization, compensation of producer costs, lending at preferential rates, and tax holidays. All these measures can reduce the market value of products.
In developed countries
We have already figured out what directive pricing is. A market economy does not openly recognize its necessity. However, no one is in a hurry to completely abandon its use. The state may fix pricing rules in the form of normative acts. They describe principles, methodology and guidelines. It is believed that 10-30% of production prices are set by directive. But the state most often does not stop there. In developed countries, indirect interference with pricing is common. All this is argued by the need to achieve social results, that is, good for the whole society.
Modern approach
Many people think that directive pricing is a team economy. However, in reality today many states are actively interfering in business processes. It is believed that in the distant future, the market has the ability to self-regulate, and in the short term, additional influence of the Central Bank and the government is necessary. It is recognized that the establishment of maximum or minimum prices for products may lead to the fact that this indicator ceases to be objective. However, no one argues that sometimes the market mechanism needs to be adjusted.
