Economic Analysis of the Effects of Wheat Price Distortions inPakistan: 1975-90

Price distortions induce the inefficient utilisation ofresources by giving incorrect signals to producers and consumers. Sincedistorted prices do not reflect the real value of resources, quantitiesof goods and services produced may not be consistent with their demand.These may be caused by a number of different reasons. They may, forinstance, be caused by monopolistic tendencies, preferential treatmentof a particular sector of the economy, establishment or diffusion of aparticular product or an input, etc. In fact, price distortions occursometimes from deliberate and sometime inadvertent government policiesof subsidies and price supports in pursuance of certain social oreconomic objectives. In fact, where there is no government intervention,prices equilibrate consumer demand with the productive capacities ofproducers. If prices are distorted by any agency their allocative roleis seriously diminished. Resource use efficiencies increase if thegovernment restricts its role to ensuring proper functioning of themarket and lets prices be determined by the forces of demand and supply.Nevertheless, it is now being increasingly recognised that agriculturalprice distortions are inherently adverse to the national economy becausethey stimulate a non-optional transfer of resources out of agriculturewhen set too low, and putting an excessive burden on consumers when setabove world prices. This study shall discuss the price interventionmechanism adopted in Pakistan, then; analyse the effects of distortionsof prices and the role of distorted prices in achieving the abovementioned objectives.