Tag Archives | price control

When Popcorn Costs More than the Movie

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Image credit: PVR CInemas

Typical multiplex experience in Chennai – Popcorn: ₹180; Pepsi: ₹200. The all important movie ticket: only ₹120.

By Natarajan Ramalingam (@natrajdr)

While a cinema ticket in a multiplex costs ₹250 or more in other metros, the price caps set by the the state government in Chennai provides the same ticket at significantly lower costs. Sounds good, doesn’t it? Maybe, maybe not.

Tamil film industry has been entwined with the state politics for a long time – with prominent cine actors and writers becoming politicians on one hand and the use of movies as a medium for political messaging and image building on the other. Successive governments in the state have claimed cinema as “the primary medium of entertainment for the common man” . While the validity of the claim is difficult to prove due to the changing times and tastes of the public, the government however continues to make it.

This claim provides the legitimacy for the government to intervene and regulate the industry to make the medium of entertainment “affordable to the common public – especially the poor”.

The increase in popularity of vernacular cable TV during the early 2000s, led to a fall in occupancy rates in theatres. Faced with a consequent fall of the entertainment tax rate, the government allowed for variable pricing during the first two weeks of any movie’s release.

This variable pricing mechanism did not impact tax collection as much of the increase in pricing was in “black” and was pocketed by the cine distribution/exhibition industry. The politicians saw an opportunity in this space to show themselves as pro poor by regulating the prices – with minimal impact on revenue to the state.

On 1st Jan 2007, the State of Tamil Nadu, through an amendment to the Tamil Nadu Cinemas (Regulation) Rules, fixed the minimum and maximum prices that can be changed for cinema hall tickets. The fixed prices range from ₹4 for Non-AC cinema halls in municipalities and village panchayats to ₹120 in the AC multiplexes that are contained within shopping malls.

The implementation has helped keep the prices of cinema tickets quite low in the state – ticket prices at multiplexes in comparable metropolis such as Kochi and Bangalore range from ₹300 to ₹500. It is interesting to note that another state which has a strong connect between politics and the film industry, Andhra Pradesh, also have similar laws capping the price of cinema tickets.

But this has come with long term unintended consequences.

Cinema, by its inherent nature, is a very risky industry. Notwithstanding the risks of a movie being completed from the point of inception, there are huge risks on the success of the films that are released (people’s taste, popularity of the stars, novelty of the theme, etc). In such an industry, the model will be to capture increased profits in cases of increased demand (a “Hit” movie) – what finance terms as a “higher-risk-higher-reward” mechanism. The price cap prevents the industry from capturing a higher amount of reward except by way of having cinema on the halls for a longer duration. But video piracy has led to the reduction in the “shelf life” of a new movie.

Investments in developing new and upgrading existing cinema halls have fallen due to high costs of setup and the low returns therein. Moreover, the opportunity cost of land for smaller theatres have increased – due to the increase in land value and stagnation in ticket revenue. Theatres in small towns have put the land for other use – malls, apartments and such.

Most cinemas have looked for alternate sources of revenue – snack and parking fees in multiplexes cost more than the ticket prices themselves! While the cinema tickets themselves are cheap, the cost of the “transaction” of watching a movie is high.

No allowances for inflation-based increases were made in the regulation. While the labour and utility costs have increased with time, the price ceiling have remained constant even after 10 years. The cap has led to continued use of the practice of selling tickets in “black”.

In a separate but related move the government, to boost Tamil language, decided to waive off the entertainment tax for tamil movies with tamil titles. This has led to a situation where the government doesn’t have an interest in increasing the ticket price – as there will be minimal corresponding increase in the tax collection. This tax break and the price cap has meant that the exhibitors of other language movies make lesser revenue per ticket than their Tamil counterparts.

Contrast this with the neighboring state of Kerala. The state laws there do not provide the government with the ability to set prices – only decide on the taxation that can be applied. An open market – same entertainment tax rates regardless of language and content and the ability for the cinemas to be flexible on pricing – has enabled the cinema exhibition industry to grow. The number of screens in the state has increased from 408 in 2014 to 516 by late 2016.

The regulation from the state of Tamil Nadu has helped keep the prices low – much lower than what the consumers were willing to pay (if compared with similar consumers in other states). While consumers have been happy, in the long term this has squeezed the profitability of the cinema exhibition industry. The Madras High Court has recently directed the state government to take a “realistic and rational decision” on ticket pricing.

Is it time for the government to withdraw itself from regulating this industry to its peril?

Natarajan is a alumnus of the Takshashila GCPP, an engineer by education, manager by profession and an aspiring policy analyst out of curiosity (@natrajdr)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Rent Control in Mumbai

By Shubham Paliwal

Demand and supply mismatch created by price ceilings causes poor and reduced accommodation for the lower income people.

 The ‘Bombay Rents, Hotel and lodging House Rates Control Act, 1947’ served its purpose in the short term but in the longer term it led to reduced supply of houses for rents, dilapidated houses, black income and reduced taxes to the government. The rent control act should have been modified and the second generation rent controls should have been adopted as was done by many European countries.

The ‘Bombay Rents, Hotel and lodging House Rates Control Act’ was introduced because of the acute shortage of houses in Bombay due to the world war and partition of colonial India. The purpose of the act was to prevent exploitation of the tenants and to prevent speculation. The prices were kept low to provide relief to the city’s migrants after the partition. It was supposed to benefit the tenants.

Under it, the state put a cap on the amount of rent a tenant paid to a landlord, and this amount remained virtually frozen irrespective of inflation and the consistent rise in the market rates over time. Rents at about 19,000 buildings were set at 1940 levels to prevent owners from charging excessive rates during a time of distress.

Rent Control bombay

In its initial years, the system served the purpose of creating affordable housing at stable rents but it failed in its purpose in the long run. It did help the tenants but it led to market distortion and negatively affected the interests of the landlords. The prolonged continuation of first generation rent control law led to various unintended consequences.

It led to a consistent degradation of housing stock because builders and developers had no incentive to generate more rental housing (as the rents were much lower than the prevailing market rates). Thus, almost all new housing being built was for ownership purposes (most of it for the upper-middle classes and above). Rent controlled buildings were often unkempt and dilapidated because the nominal rents did not motivate landlords to spend on maintenance.

An amendment to the Rent Control Act in 1999 allowed flats to be rented out, without rent control, on a leave-and-license basis for one year at a time. This lead to surge in the prices of uncontrolled rental properties due to market distortion created by the shortage of housing stock being built for rental purposes.

Rent controls gave rise to the informal pagdi (or pugri) system, where tenancy is transferred from one tenant to another at property rates a little below prevailing market rates and the landlord and tenants both have a share in it. As tenants held capital in the form of black money (share in pagri) the central government could not levy wealth tax and capital gain tax on it. Moreover municipal taxes were linked with rent, therefore, along with freezing of rent, income of municipality also got frozen and fixed. In order to make up for increasing service expenses, the municipality levied a tax as high as 142%, repair tax 402% (residential) and 755% (non-residential) for buildings repaired by the repair board. The pagdi amount being in black money led to increased investments in illegal trades and business. Even though landlords got tax free black money income on every transfer of tenants, they shuddered away their responsibility of repairing buildings on the plea of meager rent income.

Thousands of rent-controlled tenants are becoming millionaires as developers tear down crumbling colonial mansions to build luxury towers for the rich and pay huge sums to the tenants to vacate the apartments. In suburban areas, where old chawls were demolished by builders for new houses, old tenants of chawls were given free flats worth lakhs in the new building as alternate accommodation. A large section of the tenants got premises for residence and business at ridiculously low rates.

Tenancy rights continued even after the collapse of a 100 year old building. Old houses started collapsing for want of proper maintenance and repair. Instead of amending the Act, repair cess act was introduced under which landlords were exempted from liability to repair buildings and tenants paid repair cess upto 400 to 700%.

With rent control in place, people are lined up for housing, and therefore, the landlord can discriminate on the basis of who will take the most meager accommodations.

Price ceilings set below the equilibrium price arrived at through supply and demand, increase the demand for apartments. Landlords decide to withdraw from the market as they do not receive the full amount that they would be able to charge in a free market, for example by selling apartments and investing elsewhere. The supply of accommodation is therefore reduced leading to queues and waiting lists for apartments caused by the increase in demand. Some landlords may impose certain criteria on the tenants they accept, causing discrimination against certain categories of tenant.

Rent Control Bombay1

Thus, overall the rent control act was beneficial only in the short term for the economy. In the long term it prevented modernization and led to increase in black money at the cost of taxes that the government could have collected and used for other purposes. It led to market distortion by creating a mismatch in the supply and demand of houses. The benefits accrued by the tenants were way more than was desired or necessary, the loss to the economy in terms of taxes was huge and thus it was not a wise move by the government. The government should have modified the rent control law much before by learning from the experiences of other economies.

Tenancy rent controls (also known as second-generation rent controls) are much more common in the contemporary world. One important feature is the “vacancy decontrol” provision which frees landlords to set rents freely once a rental unit becomes vacant. The amount of rent increase a landlord can impose on a sitting tenant is also limited. It also regulates or prohibits the practice of collecting nonrefundable deposits, limits the ability of landlords to evict sitting tenants, and restricts the use of fixed-term contracts.

Shubham Paliwal is a part of the GCPP’13 cohort at the Takshashila Institute.

[This and the other three essays on Price Controls was submitted as part of the Economic Reasoning coursework. Students were asked to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 4 best answers were picked. The other three were on Price Control on Prescription Drugs in Europe and Price Control on Milk Products in Vietnam, Price Control on Gasoline in the US].

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Price Control on Gasoline in the U.S. (1970s)

By Ashish Devadiga

The 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

In the 1970s, when the price of crude oil tripled on the world market the then President of United States, Nixon imposed a price ceiling, on both crude oil and gasoline. There was a maximum price allowed by law to be charged for gasoline. Any gas station owner charging more than this maximum price would be guilty of fraud. Price controls were turned in to address the shortage of gasoline. This was done due to e public demand to keep the prices low. But the artificially depressed pump prices imposed during the oil crisis of 1973 — which stayed in place in various iterations through 1980 — brought about lines at gas stations and an artificial shortage of gas.

Dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline. The price controls resulted in a fuel-rationing system that made available about 5 percent less oil than was consumed before the controls. Consumers scrambled and sat in lines to ensure they weren’t left without. Gas stations found they only had to stay open a few hours a day to empty out their tanks. Because they could not raise prices, they closed down after selling out their gas to hold down their labor and operating costs.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days. Image Source: Business Insider

The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled. In 1979, for example, the United States fixed the price of gasoline at about $1.00 per gallon. If the market price had been $1.20, a driver who bought ten gallons would apparently have saved $.20 per gallon, or $2.00. But if the driver had to wait in line for thirty minutes to buy gasoline, and if her time was worth $8.00 per hour, the real cost to her was $10.00 for the gas and $4.00 for the time, an overall cost of $1.40 per gallon

To meet the decrease in their revenues, gasoline stations would commonly charge for washing the windows, checking the tires, and so forth. The price of oil used in oil changes would be raised. Those having oil changes at the station were favored in access to gasoline during the years of the price ceiling. Some gas station owners ran the line to the gasoline pump through the car wash.

By the Iranian oil crisis in 1979, the controls had grown unsustainable as oil prices escalated in global markets. President Carter waived most of the controls on oil and gas prices to make more fuel available.

The resulting sharp price increases ushered in a new problem: double-digit inflation, as businesses quickly passed on their higher fuel costs and workers’ unions demanded cost- of-living increases to keep pace with higher prices. The surge in inflation put the Federal Reserve in crisis mode. It ordered it’s largest-ever increase in interest rates in October 1979, plunging the economy into a deep recession.

By the 1980s, Congress and the administration had figured out that price controls were not the answer. President Reagan, abolished the oil and gas price controls upon entering office in 1981.

Harvard University economist Joseph Kalt concluded that the 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

The price ceiling did not really help and a better alternative would have been to let prices rise, giving oil companies an incentive to produce more and consumers an incentive to conserve.

Ashish Devadiga is a GCPP-13 alumnus

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price Control on Prescription Drugs in Europe and Price Control on Milk Products in Vietnam].

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A Ban on Surge Pricing will Create Shortages

By Anupam Manur (@anupammanur)

Instead of a price ceiling on cab prices, the government should look at all the ways in which it can increase the travel options within the city.

Karnataka’s Transport Minister Ramalinga Reddy recently unveiled a new policy to regulate cab aggregator services such as Uber and Ola. While Karnataka previously had a policy to regulate regular taxis as ride-hailing services under Radio Taxi Scheme, 1988, Uber and Ola were not covered under the law, as they were aggregator services and not companies that own and operate vehicles for hire. However, as the app-based on-demand cab aggregator companies became increasingly popular, the government sought to bring them under the regulatory ambit.

The policy has introduced a few concessions for the cab aggregators, in a move to increase the supply of cabs. They have dropped the restrictions on the age of the vehicles, reduced the number of years that a driver had to be a resident in Karnataka from five to two, and has allowed drivers to switch between the ride hailing apps, as per their choice. They have also halved the license fee and security deposit. All of these moves will benefit the companies and the customers alike.

However, the biggest policy that will have a detrimental effect on the state of urban transport in Bangalore is the decision to disallow surge pricing for these companies. Both Uber and Ola use an algorithm to determine the prices based on real time demand and supply. If the demand for cabs were considerably higher than the supply, then the app would tell the customer that prices have surged. The surge pricing not only reduced demand, but is also a tool to increase the supply. A higher price will automatically incentivise more drivers to go to the area with surge pricing. However, the surge prices can, at times, be quite ridiculous, which is what caught the authorities’ attention. On New Year’s Eve, for example, Uber had a surge pricing of 10X, that is, ten times the normal amount.

7u

Effectively, the government has put a price ceiling on what these companies can charge the customer. It has given a band with a fixed upper limit, within which the price charged to the customer has to fall. While, this might seem like something to cheer about for the customer at the first glance, a closer inspection will reveal that it will actually end up hurting the customer as well as the companies.

Price ceilings simply do not work, as economic history has repeatedly taught us. A price ceiling will simply create a shortage in the supply of the good in question and create distortions in the market, which will hurt the very customer that such laws are intended to protect. In this case, a ban on surge pricing will lead to a reduction in the number of taxis available in the market, thereby creating welfare loss to the customers who demand the taxis.

The supply of any commodity depends on the price. At each price point, a supplier (driver in this case) will decide whether it is profitable to sell at that price point. Auto rickshaws normally charge 1.5X from 9PM – 6AM, in a bid to be compensated for working late hours and at times that other would not be willing to. Imagine if a similar price cap had been put in place for autos, there wouldn’t be any autos available for hire after 9PM.

Similarly, during peak hours and other times of high demand, in the absence of surge pricing, an Uber driver would not consider it worthwhile to switch on the app or accept ride requests and thus, leading to shortages.

Another major impact of this ruling would be that Bangalore would lose out on the new investment that these companies had pledged. Uber, which has now partnered with 30,000 cabs in the city had planned to expand to about 1,00,000 cabs in the next few years. Uber and Ola combined had pledged to invest around Rs. 15,000 crores in the next few years in Karnataka. With regressive laws such as this, the state could easily lose this investment to neighbouring states. The other worry is that other Indian states could follow this bad example. Maharastra was considering a similar move and it could get buoyed by the Karnataka move.

Finally, the government must rethink whether this is the best method to achieve its objectives. The intention behind this move is to increase the supply of public transport at affordable rates for the consumers. Instead of creating distortions in the market by implementing a price cap, the government should look at other ways to make the market more competitive and remove entry barriers. The government could consider allowing flag down taxis on the streets, like they have in all other major metros in India, which will surely increase the supply of taxis. It could also allow shared autos to ply on Bangalore roads for fixed routes, which will ease the demand for taxis. Another related measure is to allow private busses of all sizes on Bangalore roads, which is currently disallowed. In short, the government should look at all ways to improve public transport in Bangalore and ways to increase the number of options available for customers to travel in the city. This will surely reduce the excess demand for Uber and Ola, which will automatically make surge pricing redundant.

Anupam Manur is a Policy Analyst at the Takshashila Institution.

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