1. Government Intervention in Markets
Chapter 5

2. Government Intervention in Markets
If the government believes people are paying too high a price for an item, it will introduce a ceiling price as a solution.
If the government believes sellers are receiving too low a price for an item it will introduce a floor price as a solution.
If the government believes it must intervene in a market for social or environments reasons, it will introduce a subsidy or a quote as a solution.

3. Ceiling Prices
This prevents the price of a product to rise above a certain level.
If the ceiling price is set below the equilibrium price there will be a shortage.

4. Ceiling Prices This can cause three problems:
Long line-ups to buy the product (since it will not be sold at a price lower than the equilibrium price more people will want more of it)
Black market selling – some people will buy much more than they need and then when the supply starts to run out or prices rise they will turn around and sell it to others to make a profit for themselves.
Quality can suffer – sellers are in the business of making money and they might start trying to cut costs out in the production so they can make more money resulting in a poorer quality product.

5. Floor Prices
This prevents the price of a product from falling below a certain level.
If the floor price is set above the equilibrium price there will be a surplus.

6. Floor Prices This can cause two problems:
Excess surplus – since the company cannot lower prices to sell their items they will have products left over. They will have to store them or try to turn them into something else (ex. Use the excess milk to produce cheese and butter)
Overall consumers are paying a higher price than the equilibrium.

7. Subsidies and Quotas
Ceiling prices and floor prices both result in less of the product getting into the consumers hands (since it is away from the equilibrium price because of these policies).

8. Subsidies
A subsidy is a grant of money made to a particular industry by the government.
This government policy has an advantage of benefitting buyers with lower prices and sellers with extra revenue. It also means more of the product makes it into the consumer’s hands.

9. Subsidies Subsidies can have their drawbacks:
They are funded by the taxpayers
They can keep inefficient producers in business
Can be a barrier to fair trade

10. Quota
A quota is a restriction places on the amount of product that individual producers are allowed to produce. If the item is inelastic then an increase in the price will result in an increase in revenue since consumers don’t have other options to substitute.

11. Rent Control
Example of a Price Ceiling. Governments can intervene and control rent prices by freezing them where they are or reducing them. If the price is below the equilibrium price in the market people who own the building will not want to build more since they are not getting enough for the ones they have currently, also if the apartments are rented they may not keep up with regular maintenance of the building which would normally be done to attract new tenants. However, if prices rise too much some people could be without a place to live.

12. Minimum Wage
Example of a Floor Price. This can lead to less people being employed. This creates a surplus of potential workers who cannot find a job. On the other hand it raises the income of those people are the lower end of the wage scale.