(Microeconomics) Philippines sets price ceiling for pork, chicken as food inflation soars

MANILA, Feb 1 (Reuters) - Philippine President Rodrigo Duterte on Monday signed an executive order mandating price ceilings for pork and chicken in the capital region, as costlier meat has propelled food inflation to a double-digit level.

 

Pork retail prices in the Philippines, the world’s seventh-biggest pork importer before local demand fell due to the coronavirus pandemic, jumped more than 50% in January from a year earlier as African swine fever hit hog farm operations.

 

The resulting pork supply crunch has also kept prices of chicken elevated as demand increased, despite a domestic oversupply of poultry meat.

 

The upward pressure on pork and chicken prices gained momentum during the Christmas holidays, pushing annual inflation for meat to 10% in December, and adding to overall inflation which hit 3.5%, the highest level in nearly two years.

 

Rising inflation, which economists expect to be above the midpoint of the government’s full-year target range of 2%-4% in January, could put the central bank under pressure to reverse its accommodative monetary policy aimed at supporting the pandemic hit domestic economy.

 

Pork prices at markets in Metro Manila must now be sold at 270-300 pesos ($5.62-$6.24) per kg, from more than 400 pesos in some outlets since December, according to Duterte’s order. The price of dressed chicken is now pegged at 160 pesos per kg from as high as 200 pesos per kg. To stabilise prices, Agriculture Secretary William Dar said in January that pork imports may be tripled this year to 162,000 tonnes.

 

(Reporting by Enrico Dela Cruz; Editing by Martin Petty)

The article details the Philippines issuing a price ceiling on pork and chicken, as African swine affected hog operations resulting in a supply crunch, Government Intervention, in the functioning of markets here is backed by the incentive to achieve allocative efficiency, as the free market system does not always function equitably. “A price ceiling maximum price set by the government at which a product is sold below the equilibrium price which is where demand is balanced with supply.

In Diagram 1, the equilibrium quantity demanded and supplied Qe, results in an price Pe (400 pesos). Here supply is inelastic, because of the african swine related supply crunch, pushing for intervention as supply cannot be shifted to the right to be able to reduce price, to ensure accessibility by citizens, the price ceiling was introduced. The government intervenes to regulate the price of meat, so it is equitably accessible across income groups. The price ceiling for pork at Pc (270-300 pesos), causing quantity demanded to rise from Qe to Qd, following the law of demand.The price ceiling Pc causes the quantity supplied to decrease from Qe to Qs, because as revenue generated from products fall, producers are not capable of supplying quantity demanded at the lower price. The quantity demanded increases, at the lower price, from Qe to Qd. The price ceiling does not allow the signalling and incentive functions of price, and hence does not the market to return to equilibrium causing a shortage.

In Diagram 2, the equilibrium consumer surplus - area above Pe and under D=MB (A+B); and producer surplus - area above S=MC and below Pe (C+D+E) is maximum, and Marginal cost = Marginal benefit, achieving allocative efficiency. However, as price ceiling is imposed, Q1 is the amount of chicken and pork produced and consumed, making consumer surplus only upto Q1 i.e. (A + C), and producer surplus is upto Q1, i.e area E. Also, at Q1 MB>MC resulting in an underallocation of resources to the production of meat, also seen by the quantity demanded Q3 bigger than quantity supplied Q1. The comparison between total social surplus at Pc (A+C+E) and at Pe (A+B+C+D+E), represents total deadweight loss, at (B+D), indicating the market is not getting enough Pork and allocatively inefficient.

 

The government intervenes in the market because in the short run, the price ceiling would be effective in ensuring consumers' ability to buy meat as more people can now afford them, however there are not enough goods to satisfy demand. The emergence of this shortage can present itself in the form of non-price rationingmethods, where goods are portioned even among those who can afford it, such as the first come first served principle, favouritism by the butcher shops or the emergence of black markets. People may hoard the meat bought at Pc and then resell at higher prices to consumers, making consumers are worse off.

 

Businesses in the short run will face revenue loss since selling below the price level will not only cause shortages in supply but in the long run, also push businesses out and incentivise businesses to switch. The main problem towards the inflated prices of chicken and pork is dwindling local supply, and the introduction of the price ceiling only further negatively impacts local supply. To combat shortages, the government needs to shift the supply curve to the right. However, tripling imports by 162,000 tones (Reuters Staff) address’s shortages but also negatively impacts local producers.

 

Encouraging local supply calls for further intervention, the government needs to incentivise farmers to - by announcing an end date for the ceiling, which will allow farmers to recover costs, and farmers hit by the African swine could be compensated with subsidies. Alternate solutions could detail strict breeding laws surrounding hog operations, to ensure further outbreaks can be contained, and supply replenished.

 

In conclusion, government intervention by price ceiling in the short run will make pork and chicken more affordable but also limit supply to only a small percentage of people. In the long run, the businesses will be negatively impacted resulting in a rise in unemployment and consumers will be worse off due to diminishing supplies of pork and the emergence of expensive substitutes. Therefore further intervention is required, to sustain the consumption of pork and chicken.

Tragakes, Ellie. Economics for the Ib Diploma Coursebook with Cambridge Elevate Edition. 3rd ed., S.L., Cambridge Univ Press, 2020.