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Profit Price Policy

 Profit Price Policy

            In developing nations, the Public Sector Enterprises are required to play a dominant role in economic development; PSEs follow the profit price policy. Such a policy would make the state utilise its own resources rather than taxing its citizens. PSEs must be carried on a profit making basis not only in the sense that the public enterprises must yield an economic price but also get for the community sufficient resources for financing a part of investment and maintenance outlay of the government.

This involves a profit price policy regard to PSEs. The theory of no profit no loss in PSEs is particularly inconsistent with a socialist economy and if followed in a mixed economy nations, it will hinder its development. In support of this view, in USSR, PSEs made a double contribution to development finance; reinvestment of profits for their own expansion and contribution to the state budget.

Arguments for a Profit Price Policy

            The following arguments are advanced in favour of a profit price policy.

  1. When the state makes large investments in establishing PSEs, it expects a return in the form of profits in order to enhance its resources for the development of the economy.
  1. The main aim of every private enterprise is to earn profits. It is therefore essential that PSEs should also earn profits and should not be dependant on the state for financial help and subsidy.
  1. When PSEs operate side by side with private enterprises and compete with them in such areas as oil, steel, consumer goods, shipping, airways etc. they must earn profits like private enterprises.
  1. Even in the case of those PSEs where the state has a monopoly, it is not desirable to have a no profit no loss policy or change a low price to consumers of the product or service. For there is no guarantee that the users of the product or service will save more on this count. Therefore the best course is to change a price which gives a minimum of profit to the PSE which will ultimately go to the state for capital formation.
  1. The running of PSEs on profit price policy will contribute to the general revenues of the state. As pointed out by Indian Planning commission “When taxation has its limits, public exchequer should benefit by the surplus of public enterprise. When private sector pays a portion of its profits for general revenues, there is no grounds and debt servicing and even dispenses with deficit financing.
  1. Further surpluses, accruing from profit making enterprises provide adequate funds for improvement, modernisation and expansion of the plants in PSEs.

What Profit Price should be followed?

            Nevertheless, it is difficult to have a particular rate of profit for all the PSEs. Moreover, all PSEs cannot earn profits simultaneously for the following reasons.

  1. Those PSEs which have not broken even cannot earn profits for the reason that their overhead costs will be high.
  1. In the case of heavy industries, the gestation period is long. Therefore, it takes them a very long period to break even and start earning profits. At the most such PSEs pay their way and not run in losses.
  1. in the case of public utilities, public welfare and not profitability is the principle objective. They try to equate MC with price. They lay stress  on output rather on rate of return on investment.

Criticism

  1. Certain economists do not favour profit price policy in the case of all PSEs. Some advocate a no profit no loss policy for public utilities or the marginal cost pricing rule. Others accept the profit price policy with certain reservations.
  1. In cases, where the product of a PSE is used as an input for production in the private sector, a profit price policy will adversely affect the development of the private industry.
  1. If the price of products of PSEs is rigged up to provide a surplus, the pertinent question arises why consumers of those products should be made to pay a special tax through the back door for the benefit of the state.
  1. In those PSEs where the government has a monopoly or semi monopoly , there is a great temptation on their part to deliberately create huge surpluses by charging the users of their products very high prices.
  1. Such a profit price policy is therefore harmful to the society for the reason that high prices can lead to a high cost economy.

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