Government Intervention

1
Government Intervention in the Market
2
Government Intervention in the Market

• The Control of Prices

3
THE CONTROL OF PRICES

• Equilibrium price and the absence of shortages
  and surpluses
• Minimum prices
• justification
• effects

4
Minimum price price floor
P
S
Pe
D
Q
O
5
Minimum price price floor
P
S
minimum price
Pe
D
Q
O
6
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses

7
Maximum price price ceiling
P
S
Pe
D
Q
O
8
Maximum price price ceiling
P
S
Pe
maximum price
D
Q
O
9
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices

10
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices
• justification

11
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices
• justification
• effects

12
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices
• justification
• effects
• dealing with resulting shortages

13
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices
• justification
• effects
• dealing with resulting shortages
• rationing

14
THE CONTROL OF PRICES

• Minimum prices
• justification
• effects
• dealing with resulting surpluses
• Maximum prices
• justification
• effects
• dealing with resulting shortages
• rationing
• black markets

15
Effect of price control on black-market prices
P
S
Pe
D
O
Q
16
Effect of price control on black-market prices
P
S
Pe
Pg
D
O
Q
17
Effect of price control on black-market prices
P
S
Pe
Pg
D
O
Qd
Qs
Q
18
Effect of price control on black-market prices
P
S
Pb
Pe
Pg
D
O
Qd
Qs
Q
19
Effect of price control on black-market prices
P
S
Pb
Pe
Pg
D
O
Qd
Qs
Q
20
Government Intervention in the Market

• Indirect Taxes

21
INDIRECT TAXES

• Specific and ad valorem taxes
• Effects on supply curve

22
Effect of a tax on the supply curve
P
S
Q
O
23
Effect of a tax on the supply curve
P
S specific tax
S
Q
O
24
Effect of a tax on the supply curve
P
S
Q
O
25
INDIRECT TAXES

• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation

26
INDIRECT TAXES

• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
• the producers' share
• the consumers' share

27
Effect of a tax on price and quantity
P
S
P1
D
Q1
Q
O
28
Effect of a tax on price and quantity
P
S tax
S
P2
P1
D
Q2
Q1
Q
O
29
INDIRECT TAXES

• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
• the producers' share
• the consumers' share
• Elasticity and the incidence of taxation

30
Incidence of tax inelastic demand
P
S
P1
D
Q1
O
Q
31
Incidence of tax inelastic demand
P
S tax
P2
S
P1
D
Q1
O
Q
32
Incidence of tax inelastic demand
P
S tax
P2
S
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
33
Incidence of tax elastic demand
P
S tax
S
P1
D
Q1
O
Q
34
Incidence of tax elastic demand
P
S tax
S
P2
P1
D
Q1
O
Q
35
Incidence of tax elastic demand
P
S tax
S
P2
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
36
Incidence of tax elastic demand
P
S tax
S
P2
CONSUMERS SHARE
P1
D
PRODUCERS SHARE
P2 - t
Q2
Q1
O
Q
37
Incidence of tax inelastic supply
P
S tax
S
P1
D
Q1
O
Q
38
Incidence of tax inelastic supply
P
S tax
S
P2
P1
D
Q1
O
Q
39
Incidence of tax inelastic supply
P
S tax
S
P2
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
40
Incidence of tax inelastic supply
P
S tax
S
P2
CONSUMERS SHARE
P1
PRODUCERS SHARE
D
P2 - t
Q2
Q1
O
Q
41
Incidence of tax elastic supply
P
S tax
S
P1
D
Q1
O
Q
42
Incidence of tax elastic supply
P
S tax
P2
S
P1
D
Q1
O
Q
43
Incidence of tax elastic supply
P
S tax
P2
S
CONSUMERS SHARE
P1
D
Q2
Q1
O
Q
44
Incidence of tax elastic supply
P
S tax
P2
S
CONSUMERS SHARE
P1
PRODUCERS SHARE
P2 - t
D
Q2
Q1
O
Q
45
(No Transcript)
46
INDIRECT TAXES

• Specific and ad valorem taxes
• Effects on supply curve
• The incidence of taxation
• the producers' share
• the consumers' share
• Elasticity and the incidence of taxation
• Implications for tax policy

47
Government Intervention in the Market

• Government Rejection of Market Allocation

48
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages

49
The demand for and supply of hospital treatment
P
S
D
P0
Qd
Qs
Q
50
The demand for and supply of hospital treatment
P
S
Pe
D
P0
Qd
Qs
shortage
Q
51
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages

52
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal

53
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification

54
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification
• the market for illegal products

55
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification
• the market for illegal products
• comparison with legal prices

56
The market for an illegal drug
P
Slegal
Plegal
Dlegal
Qlegal
O
Q
57
The market for an illegal drug
P
Sillegal
Slegal
Plegal
Dlegal
Qlegal
O
Q
58
The market for an illegal drug
P
Sillegal
Slegal
Plegal
Dillegal
Dlegal
Qlegal
O
Q
59
The market for an illegal drug
P
Sillegal
Slegal
Pillegal
Plegal
Dillegal
Dlegal
Qlegal
O
Q
60
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification
• the market for illegal products
• comparison with legal prices
• comparison of prohibition and taxation

61
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification
• the market for illegal products
• comparison with legal prices
• comparison of prohibition and taxation
• effects on demand and supply

62
GOVERNMENT REJECTION OF MARKET ALLOCATION

• Providing goods free to consumers
• justification
• effects
• the case of health care
• problems of shortages
• methods of dealing with shortages
• Making products illegal
• justification
• the market for illegal products
• comparison with legal prices
• comparison of prohibition and taxation
• effects on demand and supply
• effects on price

63
Government Intervention in the Market

• Agriculture and Agricultural Policy

64
AGRICULTURE AND AGRICULTURAL POLICY

• Why governments intervene in agriculture
• to reduce price fluctuations
• to raise farm incomes
• to protect rural communities
• to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations
• fluctuations in the harvest
• low price elasticity of demand

65
Elasticities of demand for various foodstuffs (UK)
Source National Food Survey 2000 (National
Statistics, 2001), extracted from Tables 6.1,
6.3, 6.4 and 6.5
66
Elasticities of demand for various foodstuffs (UK)
Source National Food Survey 2000 (National
Statistics, 2001), extracted from Tables 6.1,
6.3, 6.4 and 6.5
67
Inelastic demand for food
Sa1
P
P1
D
Q
O
68
Inelastic demand for food
Sa1
Sa2
P
P1
D
Q
O
69
AGRICULTURE AND AGRICULTURAL POLICY

• Why governments intervene in agriculture
• to reduce price fluctuations
• to raise farm incomes
• to protect rural communities
• to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations
• fluctuations in the harvest
• low price elasticity of demand
• Causes of declining farm incomes

70
AGRICULTURE AND AGRICULTURAL POLICY

• Why governments intervene in agriculture
• to reduce price fluctuations
• to raise farm incomes
• to protect rural communities
• to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations
• fluctuations in the harvest
• low price elasticity of demand
• Causes of declining farm incomes
• low income elasticity of demand

71
AGRICULTURE AND AGRICULTURAL POLICY

• Why governments intervene in agriculture
• to reduce price fluctuations
• to raise farm incomes
• to protect rural communities
• to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations
• fluctuations in the harvest
• low price elasticity of demand
• Causes of declining farm incomes
• low income elasticity of demand
• increases in supply

72
Yields of selected crops (100 kg/hectare)
Source Agriculture in the European Union,
European Economy (European Commission)
73
Elasticities of demand for various foodstuffs (UK)
Source National Food Survey 2000 (National
Statistics, 2001), extracted from Tables 6.1,
6.3, 6.4 and 6.5
74
Decline in food prices over time
P
S1
P1
D1
Q1
Q
O
75
Decline in food prices over time
P
S1
S2
P1
D1
Q1
Q
O
76
AGRICULTURE AND AGRICULTURAL POLICY

• Types of government intervention in agriculture
• buffer stocks
• subsidies
• high fixed prices
• reducing supply
• structural policies
• Buffer stocks
• buffer stocks to stabilise prices

77
Buffer stocks to stabilise prices
P
Pg
D
Qd
Q
O
78
Buffer stocks to stabilise prices
P
Sa1
Pg
D
Qs1
Qd
Q
O
79
Buffer stocks to stabilise prices
P
Pg
D
Qs2
Qd
Q
O
80
AGRICULTURE AND AGRICULTURAL POLICY

• Types of government intervention in agriculture
• buffer stocks
• subsidies
• high fixed prices
• reducing supply
• structural policies
• Buffer stocks
• buffer stocks to stabilise prices
• buffer stocks to stabilise farm incomes

81
Buffer stocks to stabilise incomes
P
a
P1
D
Q
O
82
Buffer stocks to stabilise incomes
P
a
P1
Y
D
Q
O
83
Buffer stocks to stabilise incomes
P
Sa1
a
P1
Y
D
Q1
Q
O
84
Buffer stocks to stabilise incomes
P
Sa1
Sa2
a
P1
Y
P2
D
Q2
Q1
Q
O
85
Buffer stocks to stabilise incomes
P
Sa1
Sa2
a
P1
P2
Y
P2
D
Q2
Q2
Q1
Q
O
86
Buffer stocks to stabilise incomes
P
Sa1
a
P1
Y
D
Q1
Q
O
87
Buffer stocks to stabilise incomes
P
Sa1
Sa3
P3
a
P1
Y
D
Q3
Q1
Q
O
88
Buffer stocks to stabilise incomes
P
Sa1
Sa3
P3
P3
a
P1
Y
D
Q3
Q3
Q1
Q
O
89
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy

90
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
Pe
D
Qe
Q
O
91
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pe
D
Qe
Q
O
92
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pe
D
Q1
Qe
Q
O
93
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pg
Pe
Pm
D
Q1
Qe
Q
O
94
Effect of subsidies on foodstuffs in which the
country is self-sufficient
P
S
S subsidy
Pg
Pe
Subsidy
Pm
D
Q1
Qe
Q
O
95
Effect of subsidies on foodstuffs which are
partly imported
P
Sdomestic
Pw
Sworld
D
Q
O
96
Effect of subsidies on foodstuffs which are
partly imported
P
Sdomestic
Pw
Sworld
D
QS1
Q
O
97
Effect of subsidies on foodstuffs which are
partly imported
P
Sdomestic
S subsidy
Pw
Sworld
D
Qd
QS1
Q
QS2
O
98
Effect of subsidies on foodstuffs which are
partly imported
P
Sdomestic
S subsidy
Pg
Pw
Sworld
D
Qd
QS1
Q
QS2
O
99
Effect of subsidies on foodstuffs which are
partly imported
P
Sdomestic
S subsidy
Pg
Pw
Sworld
D
Qd
QS1
Q
QS2
O
100
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices

101
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices
• foodstuffs where the country is a net importer

102
Minimum price where some of the product is
imported
EU supply
P
Pw
EU demand
QS1
Q
Qd1
O
103
Minimum price where some of the product is
imported
EU supply
P
Pt
Pw
EU demand
QS1
Q
Qd1
O
104
Minimum price where some of the product is
imported
EU supply
P
Pt
Import levy
Pw
EU demand
QS2
QS1
Qd2
Q
Qd1
O
105
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices
• foodstuffs where the country is a net importer
• foodstuffs where the country is self-sufficient

106
Minimum prices for a product where the EU is
self-sufficient
P
QS1
Qd1
Q
O
107
Minimum prices for a product where the EU is
self-sufficient
P
SEU
NET COST
a
b
Pw
DEU
QS2
QS1
Qd2
Qd1
Q
O
108
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices
• foodstuffs where the country is a net importer
• foodstuffs where the country is self-sufficient
• Reductions in supply

109
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices
• foodstuffs where the country is a net importer
• foodstuffs where the country is self-sufficient
• Reductions in supply
• quotas

110
AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence of a subsidy
• High minimum prices
• foodstuffs where the country is a net importer
• foodstuffs where the country is self-sufficient
• Reductions in supply
• quotas
• taking land out of use (e.g. set aside)

111
AGRICULTURE AND AGRICULTURAL POLICY

• Justification of the CAP
• assured supplies of food
• support for farm incomes
• growth in agricultural productivity
• stable agricultural prices
• reasonable prices for consumers.

112
The cost of price and other market support for
agriculture in the EU
Source Agriculture in the European Union,
European Economy (European Commission)
113
AGRICULTURE AND AGRICULTURAL POLICY

• Criticisms of the CAP
• agricultural surpluses
• static costs

114
The cost to the taxpayer of high fixed prices
P
S
Pe
D
Q
O
115
The cost to the taxpayer of high fixed prices
P
S
Pi
Pe
D
Qd
Qs
Q
O
116
The cost to the taxpayer of high fixed prices
P
S
b
a
Pi
Pe
COST TO THE TAXPAYER
D
d
c
Qd
Qs
Q
O
Surplus
117
The cost to the taxpayer of subsidies
P
S
Pe
D
Q2
Q1
Q
O
118
The cost to the taxpayer of subsidies
P
S
a
Pf
COST TO THE TAXPAYER
Pe
b
Pc
D
Q2
Q1
Q
O
119
(No Transcript)
120
Unequal support given to different agricultural
products in the EU 2001
Source Agriculture in the European Union,
European Economy (European Commission)
121
Unequal support given to different agricultural
products in the EU 2001
Source Agriculture in the European Union,
European Economy (European Commission)
122
AGRICULTURE AND AGRICULTURAL POLICY

• Criticisms of the CAP (cont.)
• irrational relative prices
• removes disciplines of markets
• redistributive effects
• effects on the environment
• effects on the rest of the world
• effects of import levies
• effects of export subsidies

123
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses

124
Effect of the MacSharry reforms on cereal
surpluses
P
S1
P1
FARMERS' ORIGINAL INCOME
D
Qd1
Qs1
Q
O
125
Effect of the MacSharry reforms on cereal
surpluses
P
S1
b
a
P1
P2
D
d
c
Qd1
Qs1
Q
O
126
Effect of the MacSharry reforms on cereal
surpluses
P
S2
S1
b
a
P1
P2
D
d
c
Qd1
Qs1
Q
O
127
Effect of the MacSharry reforms on cereal
surpluses
P
S2
S1
b
a
P1
P2
FARMERS' REDUCED INCOME
D
d
c
Qd2
Qd1
Qs2
Qs1
Q
O
128
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems

129
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems
• Agenda 2000

130
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems
• Agenda 2000
• the issue of EU enlargement

131
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems
• Agenda 2000
• the issue of EU enlargement
• proposals

132
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems
• Agenda 2000
• the issue of EU enlargement
• proposals
• subsequent events

133
AGRICULTURE AND AGRICULTURAL POLICY

• Reforming the CAP
• price reductions
• production quotas
• set aside
• diversification low-intensity farming
• income support
• the MacSharry reforms
• effects on surpluses
• continuing problems
• Agenda 2000
• the issue of EU enlargement
• proposals
• subsequent events
• The 2002 reform proposals