Government Intervention in the Markets Economic Institutions: Changes Needed to Ensure Economic Prosperity

Government Intervention Ceiling Prices Ceiling Prices Floor Prices Floor Prices Subsidies & Quotas Subsidies & Quotas

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

Government Intervention Why then do governments intervene extensively??? Why then do governments intervene extensively??? 1. If government believes people are paying too high a price for an item 2. If government believes sellers are receiving too low a price for a product 3. If government believes it must intervene in a market for social or environmental reasons

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 Restriction placed by a government in order to prevent the price of a product from rising above a certain level Result is a shortage Result is a shortage

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

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

Floor Price Price is set above the equilibrium market at which the price will create excess demand Price is set above the equilibrium market at which the price will create excess demand A shortage equal to Q2 to Q1 A shortage equal to Q2 to Q1 The resulting surplus will allow two possible outcomes to occur: The resulting surplus will allow two possible outcomes to occur: 1. Problem of what to do with the surplus 2. Consumers pay higher price and receive less

Floor Price 1. 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 government must buy the surplus (using taxpayers’ money) with little chance that the surplus will generate a return Can’t be sold within the country at prices below floor price Can’t 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 Governments will sell it on the world market or donate it to less developed countries

Floor Price 2. Consumers pay higher price and receive less Due to floor price, consumers not able to purchase product at market equilibrium price Due to floor price, consumers not able to purchase product at market equilibrium price

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

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

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

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