If supply is greater than demand, the price of a product will decrease. If demand is greater than supply, the price of a product will increase. This is a simple rule that determines the price of almost all consumer goods. But what happens if the price is too high. What happens if there is a massive shortage or if a war breaks out and the price of everyday products such as sugar or bread skyrockets. Who will protect the consumer? And vice versa, who will protect the seller.
This is where the government steps in and imposes price controls. Price controls are imposed to help or protect particular parts of the population which would be treated unequally by the unfettered price system. With today’s technology, many farmers around the world find themselves producing far more than they can sell or a surplus and this drives down prices. Therefore to support the farmers, many governments have created price floors to increase the income of their farmers who without them would fail to make a living profit.
Japanese agricultural policy so far has focused on maintaining agricultural income by price controls. During the 1960s, Japan was in a stage of extraordinarily rapid growth. But Japanese farmers still produced more crops, namely rice, then they could sell, and this drove prices down and dwindled their profits. All the while, the industrial sector began creating massive profits. As a result, the income gap between the two was widening. Politicians knew that social and political unrest would result if the situation worsened.
And so they began to resort to price controls to protect agriculture. To increase the farmers’ income, the government placed price floors or price supports on rice and other crops. Therefore, the price of rice would not be determined by the free market but by this set price. The Japanese government set the price floor higher than the equilibrium price or the price of rice in the free market. By doing this they were sure to increase the income of farmers. But this policy had its drawbacks. The price policy impaired the basic market mechanisms.
The increased price drew away buyers, resulting in an excessive surplus of rice. In fact, rice surplus amounted to approximately seven million tons in storage, and that required three trillion yen of tax money for its disposal. Although this policy helped farmers, it became a great strain on the government and taxpayers. The Japanese government began to implement a new policy. The only way to avoid surplus under such a high price policy is to limit production. Hence, a policy to cut back on rice acreage was introduced. But this policy also ran into problems.
Reduced production was forced onto the producers and served only to dampen their motivation to produce and to hinder their drive. Another hindrance in price control is a segregated overseas and domestic market. The only way for the government to retain this kind of price policy and maintain agricultural income is by closing off its borders form imports. With this price control the government ran into many problems. It therefore abolished the Food Staple Control Act which implemented this price policy and replaced it with the New Food Staple Control Act in November 1995.
This new act liberated distribution and limited the government’s role to just the purchase and management of rice reserves. In conclusion, Japan’s price control policy was created with the best intentions to improve agriculture income. While it succeeded in that aspect, the government and its people were hurt more by this policy. Even the farmers themselves who had their production limited became unmotivated. We see from this case scenario that sometimes the government needs to take a step back and play a limited role in the economy or practice laissez-faire economics.