Administered price definition
/What is an Administered Price?
An administered price is dictated by an entity that can supersede the effects of supply and demand. It is usually considered to be less than optimal when it causes prices to be higher than would otherwise be set by the market. When the price is set too low, it tends to drive producers out of the market, or to sell their goods elsewhere.
Examples of Administered Prices
As an example of an administered price, a government regulatory commission can set the price at which electricity will be charged to customers. Similarly, a company with a monopoly over a key raw material can set a price that is higher than the market would otherwise pay. Or, an oil cartel sets the price of oil higher than the price that a freely-functioning market would set. These examples are all cases of administered prices.
Disadvantages of Administered Prices
Administered prices can have negative effects. For example, when a local government sets rent controls, landlords must charge lower-than-market rents, and so are less inclined to maintain properties. Similarly, when an oil cartel charges inordinately high prices, users react by searching for alternative forms of energy. Thus, administered prices tend to warp markets, causing unusual behaviors by participants that have less efficient outcomes than would otherwise be the case. Over the long term, administered prices tend to be unsustainable.