Policy Paper 02/2019

Reforming the law “On Prices” in Ukraine: Analysis and recommendations

Price controls describe all regulations directly regulating the price setting by the suppliers of goods and services on markets. They usually take the form of either direct setting of prices (or maximum/minimum thresholds) by government or of limits on the profitability margin or cost markups of goods. They form a part of a wider toolkit for governments to affect market outcomes, including competition policy, producer or product standards, direct market interventions by the state, taxes, subsidies and social transfers.

Economic theory yields relatively clear suggestions on when price controls are a useful instrument: Price controls can only be harmful in competitive markets. Non-competitive markets should, if possible, be made competitive using competition policy. Price controls should also not be used for social purposes: Social policy instruments should be used for social policy objectives. However, price controls are a legitimate instrument for regulating private provision of goods and services in natural monopolies which cannot be made competitive and where the market would yield inefficient results.

In Ukraine, the law “On prices”, no. 5007-VI from June 21, 2012 and the resolution no. 1548 of the Cabinet of Ministers of Ukraine from December 25, 1996 are the normal legislative context for price controls, although they have become much less widely used in recent history. Only 20 price controls remain in the resolution and of these, only 4 concern goods provided to and from private market participants. The practically most important price controls in the country, the regulation of natural monopolies through the “National Commission for State Regulation of Energy and Public Utilities” (NERC) exist essentially as a separate law.

Our analysis yields that the legal structure of price controls in Ukraine is neither unusual in an international context nor completely unreasonable. Nevertheless, the legal framework does contain the potential for rash introduction of misguided price controls without significant checks and balances. We hence suggest installing safeguards into the legal framework to make a rash and misguided introduction of price controls less likely.

Furthermore, we suggest removing some problematic aims of state pricing policy (for social purposes and economic guarantees to producers) as aims of state price policy from the law “On prices” and recommend cancelling the few remaining price controls on that some of the aims of state price policy could be reformulated to make the law less inviting on goods and services provided on competitive private markets. All in all, the Ukrainian legislation on price controls should be reformed in parts, but overall is not grossly inadequate.

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