The public price control trap: the example of energy inputs
Brazilian Journal of Political Economy, Vol. 16 No. 2 (1996), Apr-Jun / 1996, Pages 217-235
The paper argues that in controlling public prices government gets into a trap:
this control does not reduce inflation as expect in the first moment and activates factors
that will increase it later on. The analysis is developed for government administered prices
in the area of energy and employs an input-output model that takes into account the direct
and indirect impacts of price changes. When public prices are reduced, the impact on the
inflation is small; but, since this create financial difficulties for the public companies, they
will either demand government resources and/or price appreciation later on. These will act
through price expectations to increase inflation more than proportionally in the future.
JEL Classification: D57; E31.
Keywords: Inflation interventionism input-output matrix electricity