by :

Totok Harmoyototokharmoyo@gmail.com

POINTS OF PRESENTATION

Various Views About Price Regulation/Controlling

Conventional ViewIbn Taimiyah ViewAl-Ghazali ViewIbn Khaldun ViewOthers View

Conventional View on Price Regulation

Price as a result of supply-demand interaction (market as a decision maker for it’s price)

Price is invisible hand’s authority Government must not be involved in regulating

the price (ex. Price ceiling and Price floor) The loss of consumer and producer surplus

Muhammad Baqir Ash-Shadr View

The Involvement of state in market as one of fundamental principles of Islamic economics system, included the price regulating.

As an example, Malik al-Asytar (Governor) was ordered by Imam ‘Ali for regulating price clearly. This policy was aimed to reduce greediness, monopoly, and other un-fairness practices in the market.

Taqiyuddin An-Nabhani View Price Ceiling is forbidden by Islam, this idea is

based on al-hadith. The prohibition is covered whole goods and

services. There’s no specific treatment for some goods or services in this prohibition.

Price Ceiling is very dangerous , even in normal or chaos/war situation - (moral hazard, black market, speculation, externality, corruption etc)

State can just be involved in maintaining supply level in the market.

Ibn Taimiyah View The increasing or decreasing of price is not

always caused by the injustice, but some time it is also caused by the quantity of supply, intensity of demand, quantity of demand or transaction instrument.

Ibn Taimiyah view based on two different idea :According to Hambali and Syafi’i, state does not

have an authority on price controlling.Maliki and Hanafi argue that state has a right to

regulate the market price through a just price policy.

Ibn Taimiyah ViewBased on those ideas, Taimiyah concludes that : In an abnormal situation, Maliki’s idea can be implemented. This Hadith was locally accurate for Medina, but it can not

always be implemented in other region. The increasing of price is not a sign that price mechanism can

not run well, but it is a result of market power bargaining(risk, uncertainty, incentive, disincentive, quantity, etc)

Taimiyah rejects monopolistic rent or collusion practice, but support to just price mechanism.

Market Power bargaining and unlawful practice as two cause factors of curve shifting.

Taimiyah’s view in line with free-entry and free-exit mechanism in market.

Ibn Khaldun View

In normal market mechanism, state should not be involved in market mechanism

In market mechanism failure, state are suggested to get involve for normalizing market mechanism (price controlling)

Price as a result of Demand-Supply interaction. Tax has also impact to price level

Al-Ghazali View He believes that demand and supply mechanism

can drive market into an equilibrium level on price and quantity. It’s called nature regularity.

Demand as a key factor of price shifting and moving.

As a primary need of people, food has inelastic demand curve as the nature, so He suggested that food should not be sold with high profit margin. We are suggested for pursuing high profit margin through other commodities.

In crisis, state must involved in stabilizing market (subsidy, supply goods and services)

M.A. Mannan View

Price regulation must refer to three basic functions :Economy Function : productivity and poor society

income improvement through allocation and reallocation of resources

Social Function : social equilibrium between poor and rich must be maintained.

Moral Function : Enforcing Islamic value on economic activity (honesty, justice,maslahah)

Other view

Selling under and upon market price level is not allowed (assume that goods or services has an equal quality)

If market price level is an injustice price, it’s possible to sell under market price.

Blind price is forbidden in Islam

Price Floor

SD

P

Q

P1

Q1O

Price Floor

SD

P

Q

P1

Q1O QsQd

Price are determined below the equilibrium price, so it has no serious effect to the market too.

Price determined above the equilibrium price. It also disturbs the market equilibrium. Because of the quantity of supply will be increased as the price soaring (excess demand).

Two Possible Effects of Price Floor

Pf

Pf

Price Ceiling

SD

P

Q

P1

Q1O

Price Ceiling

SD

P

Q

P1

Q1O QdQs

Price are determined above equilibrium price in a normal situation, so it has no serious effect to the market.

Price determined under equilibrium price. It disturbs the market equilibrium. Quantity of demand will be higher than supply (excess demand), discrimination to the consumer (un-fair market).

Three Possible Effects of Price Ceiling

Price Ceiling

SD

P

Q

P

QO

S1

Pc

Pc

Pc

Qs Qd

P1

Quantity of supply decreased because of the production cost soaring. It influences the capability of producer to meet the quantity of demand.

Harga pada masa Rasulullah SAW membumbung. Lalu mereka melapor, “Ya Rasulullah, seandainya saja harga ini engkau patok (tentu tidak membumbung seperti ini).” Beliau Menjawab, “Sesungguhnya Allah SWT-lah Maha Mencipta, Maha Penggenggam, Maha Melapangkan, Maha Pemberi Rezki, dan Maha Menentukan Harga. Sesungguhnya aku sangat ini menghadap ke hadirat Allah SWT, sementara tidak ada seorang pun yang menuntutku karena suatu kezaliman yang aku lakukan kepadanya, dalam masalah harta dan darah.” (HR Ahmad).

Sesungguhnya pernah ada seseorang datang, lalu berkata, “Ya Rasulullah, patoklah harga ini.” Beliau menjawab, “(Tidak) justru biarkan saja.” Kemudian Beliau didatangi oleh laki-laki yang lain, lalu berkata, “Ya Rasulullah, patoklah harga ini.” Beliau menjawab, “(Tidak), tetapi Allah SWT lah yang berhak menurunkan dan menaikkan harga.” (HR Abu Dawud).

Supply follows demand with new efficiency concept or moral hazard inside

Government intervention to fulfill the deficit of quantity

Inefficiency in supply side

Q4Q1

D1

Po/Pc

S1

P

QQo

Po

Do

So

Eo

P1 Eox

Price level should be at Q1 level and So Capability

D2

E2

P2

Q2

E2x

E1

S2 S3

P4

Decreasing of supply by

moral hazard

P1/Pc

Government intervention to fulfill the deficit of quantity

AVC1

AVC2A

B

MC1=S1

MC2=S2AVC2

Q0

P1

P2

Q2 Q1

D

Q

P2

Q2

P1

D2

S

Q1

D1

P

Q

P

P*

Q*

P1

D

S

Qd1 Qs1

Ghazali’s view can be drawn as above curves. Its show that demand has big effect to the price equilibrium.

P1

P2

Q1

Consumer Surplus

Surplus for Old Consumer

Surplus for New Consumer

Surplus for New Producer

Surplus for Old Producer

Producer Surplus

P

D

Q

E

S

P

D

Q

E

S

Pc

Qs

Co

nsu

mer

Su

rplu

s

Addition of consumer surplus because of producer surplus loss (transferred) - cruelty

loss of consumer surplus (not transferred)

loss of producer surplus (not transferred)

Dead weight loss

P

D

Q

E

S

Pf

Qd

Addition of producer surplus because of consumer surplus loss (transferred) - cruelty

loss of consumer surplus (not transferred)

loss of producer surplus (not transferred)

Dead weight loss