What Is a Fixed Price System?

In a fixed price system, a government sets a ceiling on how high prices can be for either all or selected items. When only a few items have fixed prices, it is also called a mixed price system. Fixed prices are usually enforced in an attempt to lower or cap inflation. A system that fixes prices may be used to aid lower income populations or to stabilize a struggling economy.

A fixed price system can be temporary or permanent. Some of the reasons for temporary use of the system include war, shortages, and economic crisis. It can also be instituted as the result of a dramatic change in supply and demand. This is primarily to prevent price gouging when there is a shortage of a necessity such as housing.

Depending on the item, the fixed price system may actually increase true prices. If an individual is forced to wait in an excessively long line or spend time searching for a product in high demand, then the benefit of the low price can be diminished. Factoring in time lost can often significantly raise the price of an item.

The quality of items can also be affected by a fixed price system. Vendors who are forced to keep their prices low may resort to cutting corners. As a result, the value of the item diminishes and the customer gets a lower-quality product.

When only select items are subject to fixed prices, it is usually for things that are important to maintain life in that society. This can include rent, fuel, and food. There have also been caps put on the amount of interest that can be charged on loans so that people in need of money are not further jeopardized.

Many economists do not like the fixed price system, because they believe low prices can cause shortages. The belief is that while some people will enjoy the benefit of more affordable goods, they will also deplete supplies. This can result in a larger population who must do without, thus increasing demand. In essence, higher prices are believed to enforce rationing.

The opposite of a fixed price system is the free price system. There are no government controls on prices or wages with this kind of system. It is common in more economically secure countries. With this kind of system, prices are usually dictated by the market, and particularly supply and demand.