Are Price Controls Necessarily Bad? The Case of Rice in Vietnam

Abstract Most economists' instinctive reaction to price controls is that they are harmful. Its strong enforcement results in shortages and resource misallocation, while weak enforcement often leads to black markets and high transaction costs. Given these instincts, this paper assesses the pros and cons of rice price controls in Vietnam using a multi-sector multi-household general equilibrium model. These price controls fix producer prices and allow government marketing agencies to sell at higher prices and hence are, in part, a revenue raising device. As such, they may be part of an efficient tax mix, particularly so since agricultural incomes and production go untaxed under the formal tax system. It is argued that such controls can act to dampen costly domestic adjustments in the face of volatile world prices. It is shown that this system can be supported as welfare enhancing under conditions currently prevailing in Vietnam.