Correct, timely government intervention

Opinion / Liu Shinan

Correct, timely government intervention

By Liu Shinan (China Daily)
Updated: 2007-07-11 07:07

The government of Lanzhou could not have anticipated that its decision
last week to cap the price of beef noodle, a regular breakfast of the
Northwest China city's residents, would have yielded a by-product - food
for thought.

After the local media reported that the price administration of the
Lanzhou municipal government ruled that the price of a regular bowl of
the noodle should not exceed 2.50 yuan (32 cents), commentators of
traditional and modern media outlets across the country became excited.
Criticizing the local government, they all used the same accusation:
"Violation of market rules".

Though expressed in different ways, they all based their arguments on a
common understanding, the rise and fall of the price of a commodity
should be left to market forces, which exerts influence according to the
fluctuation of supply and demand. If the price exceeds a certain level,
consumers would shun the commodity for alternatives; the dwindled demand
would then force the price to return to a reasonable level. This is one
of the core theories of classical economics.

However, a complete or perfect model of market mechanism is only an ideal
concept, which never exits in reality. Real market conditions are much
more complicated. Non-market forces, such as laws and regulations, are
needed to curb or prevent artificial moves that lead to unfair
competition or a distorted supply and demand. Administrative measures are
also needed to address non-commercial concerns, such as protection of the
environment and energy sources.

In the beef noodle case, the government move was targeted at one of the
market irregularities - the city's beef noodle restaurants' attempt to
monopolize the price.

As if having foreseen what media critics would say, the price bureau of
the Lanzhou municipal government made a careful investigation on the
production cost of the beef noodle and the retailers' move to raise the
price. The bureau said that even with the rise in the cost of raw
materials such as flour, beef, oil and pepper being taken into account,
the 20 percent rise in the price of each bowl "far exceeds the price rise
of the raw materials".

Food prices, in the case of pork, beef, eggs and rice, have soared
dramatically in recent months. It is understandable restaurant owners
would raise their prices to offset the loss. In reality, however, the
price rise of raw materials is all too often used as an excuse by these
people to garner more profits by excessively raising the prices of their
products.

Some people may argue that the increase in the beef noodle's price will
go toward workers' wages who are also feeling the effects of rising
prices. But I dare to assume that not a single owner has or will increase
the wages of his or her employees.

And the Lanzhou authorities have pointed out that the city's beef noodle
restaurant owners raised their prices simultaneously, indicating a
unanimous move in price fixing.

I admit market irregularities should be dealt by laws rather than by
government instructions and that improvement of the market environment
should be guaranteed by legislation rather than by administrative
interference. In today's China, however, where market mechanism is in the
process of becoming mature and economy-related legislation is yet to be
completed, certain government interference is needed for maintaining
fairness.

Beef noodle is the staple breakfast for 80 percent of Lanzhou residents.
A rise of 50 fen for each bowl is quite a burden for ordinary residents,
whose monthly income per household ranges from 500 yuan to 5,000 yuan.

Email: liushinan@chinadaily.com.cn

(China Daily 07/11/2007 page10)

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