Government Intervention in the “Free” Market

Market Failure Market mechanism fails to deliver “socially efficient/optimum” quantities and prices Possible Results: public inconvenience, hardship, starvation… injustice, discontent, frustration, anger… violence, revolution

Governments pressured to intervene in the functioning of the “free” market

Examples: Externalities:no smoking signs, pollution controls/fines Missing Mkts.: “public goods” (ex. parks) provided – paid for via tax revenue Asymmetic Knowledge: insider trading laws Lack of Competition: anti-trust, anti-collusion laws Labour Market Failure: EI, retraining programs, job centres, incentives ($) to move to “underserviced” areas Unstable Prices: “price floors/ceilings”, “quotas”, “subsidies”, etc.

A. Price Ceilings (aka Ceiling Prices) legal restriction placed by gov’t to prevent price from rising above a certain level Ex. gas prices

Ceiling Price Outcomes… more people can afford “essential” product, but… Shortages (inefficient): can cause long queues (frustration) black marketeering: stockpile as much as possible, then sell at higher price to those who can’t meet their needs quality: deteriorates as producers try to reduce costs to make more $ Others?

B. Price Floors (aka Floor Prices) Legal restriction that prevents prices from falling below a certain level Ex. milk prices

Floor Price Outcomes… producers (ex. farmers) get a higher, more predictable price/revenue, but… surpluses result (inefficient) gov’ts buy surplus with “taxpayer $” what to do with the surplus? – sell surplus on world market – donate surplus to needy countries – process surplus into less perishable forms (powdered milk, cheese, butter) Ultimately, consumers generally end up paying more for less Others?

C. Subsidies direct grant/payment of $ by gov’t to a particular industry actual costs of production would make price too high for consumers to afford consumers would substitute lower – priced alternative: incomes of producers would suffer (bankruptcy?) consumers could suffer shortages of “essentials” subsidy helps ensure that amounts produced do not decrease (aka “supply management”)

Outcomes of Subsidies buyers get lower prices & sellers get extra revenue, but… taxpayers ultimately pay for the cost of the subsidy critics say it keeps inefficient producers in business (no cost/incentive to improve operations) in global trade negotiations, subsidies seen as barriers to free trade agreements (“unfair advantage”, “anti-competitive”)

D. Quotas restriction placed on the quantity an individual producer is allowed to produce (supply management) quotas set/monitored by “marketing boards” of gov’t officials & producer reps

Outcomes of Quota Systems raises farm incomes (“Crime doesn’t pay; and neither does farming”) to give farmers a liveable wage if too many farms go out of business, supplies shrink, prices rise remaining producers could engage in monopolistic/cartel – like behaviour (“price gouging”)

But… buying more quota costs farmers BIG $ – produce full quota every year to cover cost (whether Demand exists or not) Ex. egg quota for a hen-farm costs $2.5 million agricultural vote still powerful voice in Cdn. politics (lost farms = lost votes) prices (artificially) set above equilibrium – less product produced/exchanged; less overall revenue for industry & gov’t

In the End… Government intervention (aka “management” “meddling”, “assistance”, “corruption of the free market”, etc.) is very controversial

2 Case Studies… Read p. 110 – 113 A) Rent Control #1-3 (p.110) B) Minimum Wage #1-3 (p )