Controlled Price Mechanism system prevails in socialistic and communist countries where the Government has exclusive rights on production, distribution and consumption. Here, central authority is required to solve the basic central problems of what to produce, how to produce and for whom to produce.
The Central Authority has to decide upon the various commodities which the economy should produce with the available resources. Moreover, it makes the arrangement to provide goods and services to the consumer at controlled prices.
The Government plays two types of roles in socialistic economy:
(i) It can directly influence the price mechanism.
(ii) It can indirectly influence the price mechanism.
Main Features of Controlled Price Mechanism:
The basic features of controlled price mechanism are as below:
(i) Prices are fixed by the government.
(ii) Central Planning Authority takes all the decisions on production on behalf of the government.
(iii) The authority determines the level of new investment.
(iv) The authority allocates resources in different sectors for optimum utilisation.
(v) The authority distributes the different goods among the consumers through ration shops or fair price shops.
(vi) The government fixes the prices of the different factors of production like wage rate and interest rate etc.
Role of the Government:
The government plays two types of roles in the process of price mechanism:
It includes the following sub-points:
(i) Price Ceiling
(ii) Public Distribution System and Rationing
(iii) Price Floor and Agricultural Development
(iv) Public Sector Production and Industrial Development
(v) Government Imports
(vi) Government Expenditures for the Purchase of Commodities.
(vii) Government Exports.
It is again sub-divided into two ways, such as:
(1) Monetary Policy:
It consists of several policies taken by the Central Bank of the country such as,
(i) Monetary policy during recession;
(ii) Monetary policy during inflation.
(2) Fiscal Policy:
The government can play an indirect role in the economy through its fiscal methods. It affects the revenue and expenditures of the government.
The main items included in the fiscal policy are as follows:
(i) Tax policy
(ii) Public debts
(iii) Expenditure policy
(iv) Trade policy
(v) Income redistribution policy
(vi) Government expenditures on social overheads.