Government Intervention in the Markets

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Government Intervention in the Markets

• Economic Institutions Changes Needed to Ensure
  Economic Prosperity

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Government Intervention

• Ceiling Prices
• Floor Prices
• Subsidies Quotas

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Government Intervention

• Demand and supply determines what is produced and
  how to distribute products
• Why then do governments intervene extensively???

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Government Intervention

• Why then do governments intervene extensively???
• If government believes people are paying too high
  a price for an item
• If government believes sellers are receiving too
  low a price for a product
• If government believes it must intervene in a
  market for social or environmental reasons

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Ceiling Prices

• People are paying too high a price
• Restriction placed by a government in order to
  prevent the price of a product from rising above
  a certain level
• Result is a shortage

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Price Ceiling

• Price is set below the equilibrium market price
  will create excess demand
• A shortage equal to Q3 to Q2
• The resulting shortage will allow three possible
  outcomes to occur

1. Allocation of products on first come first serve
   basis Long line-ups
2. Allocation of product by sellers preference
   Black Market
3. Allocation by government rationing Decrease in
   quality of product

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Floor Prices

• Sellers are receiving too low a price for a
  product
• Restriction that prevents a price from falling
  below a certain level
• Result is a surplus

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Floor Price

• Price is set above the equilibrium market at
  which the price will create excess demand
• A shortage equal to Q2 to Q1
• The resulting surplus will allow two possible
  outcomes to occur
• Problem of what to do with the surplus
• Consumers pay higher price and receive less

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Floor Price

• Problem of what to do with the surplus
• government must buy the surplus (using taxpayers
  money) with little chance that the surplus will
  generate a return
• Cant be sold within the country at prices below
  floor price
• Governments will sell it on the world market or
  donate it to less developed countries

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Floor Price

• Consumers pay higher price and receive less
• Due to floor price, consumers not able to
  purchase product at market equilibrium price

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Subsidies Quotas

• Subsidy
• Grant of money made to a particular industry by
  the government
• Increase in money given to suppliers, allow
  producers to make more of the product
• Supply line shifts

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Subsidy

• Benefits
• Benefits buyers with lower prices and sellers
  with extra revenue
• More of the product is exchanged
• Drawbacks
• Taxpayers pay for the program
• Keep inefficient producers in business
• Barrier to free trade

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Quotas

• Restriction place on the amount of a product that
  individual producers are allowed to produce
• Administered by marketing boards
• Representatives from the government and producers

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Quotas

• Raise incomes of producers who produce inelastic
  products, and therefore put in place if
  government believes incomes too low
• Argument is that prices are raised above
  equilibrium with the result that less of the
  product is actually produced and exchanged