1. 1.3 Government regulation on competitive markets
Copyright Mark Van Couwenberghe, 2017
Let us look at the government interventions one by one:
MINIMUM PRICE
Synonym = floor price
Direct government intervention
No market equilibrium
To protect supplier (his income)
Excess supply can be eliminated:
demotivate production
limit foreign supply (import)
and:
demotivate consumers to buy substitutes
stimulate foreign demand (export)
Real-life case: minimum wage
Your examples:
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

2. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
2) MAXIMUM PRICE
Synonym = ceiling price
Direct government intervention
No market equilibrium
To protect consumer (his income)
Excess demand can be eliminated:
rations
motivate consumers to buy substitutes
and stimulate supply:
- set subsidies
stimulate import
Phenomenon: black market
Your examples:
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

3. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
3) TAXES
Fixed tax or value tax (%)
Indirect government intervention
New market equilibrium
To fight the production and consumption of goods with a negative effect on the economy
Part of tax will be paid by the consumer (price increase)
Tax = government revenue
Your examples:
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

4. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
4) SUBSIDIES
- Indirect government intervention
- New market equilibrium
- To promote the production and consumption of goods with a positive effect on the economy
- Part of subsidy will be paid to the consumer (price decrease)
Subsidy = government cost
Your examples:
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

5. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
5) QUOTA
QUOTUM = S max
Direct government intervention
New market equilibrium
To limit the production and consumption of goods with a negative effect on the economy
Controls are necessary (if
suppliers exceed quota)
- Quota can be traded
Your examples:
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

6. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
PRICE REGULATION IN BELGIUM: 2 EXAMPLES
Price regulation has for a long time existed in a limited number of sectors in Belgium.
Market failure is a good reason for government intervention. Price regulation, on the other hand, can lead to cost inefficiencies and less competition through the formation of cartels. Optimal regulation is therefore necessary.
The market for over-the-counter (OTC) medicines (medicines that can be bought without a doctor’s prescription and that are not reimbursed) is highly regulated, and this includes price regulation, more so in Belgium than in most other European countries. The reason for price regulation is to make sure that the prices of medicines remain affordable for all consumers.
Control of prices in old people’s homes is theoretically and socially well-defended. Just as for OTC-medicines, however, a danger exists that price control can lead to an insufficient supply in the sector. Given the ageing of society, a sufficient heterogeneous supply of old people’s homes needs to be guaranteed.
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

7. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
EXERCISE
LARY is a medecine against throat pain
The government wants to protect the consumers and avoid unreasonable market prices
Q d = P
Q s = P + 967
1) Calculate market equilibrium
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

8. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
2) Price-setting (min/max price)
The government sets the price at € 1,58
This is a …………………… price
Calculate the market desequilibrium
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

9. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
3) Quota
The government sets a quotum of 1.226
Calculate the new market equilibrium
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

10. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
4) Tax (1)
The government sets a tax of 10%
The new supply = 150,91 . P + 967
Calculate the new market equilibrium
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

11. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
5) Tax (2)
The government sets a tax of € 0,20
The new supply = ………………………………
Calculate the new market equilibrium
What is the % of the tax paid by the consumer?
Calculate the tax revenues for the government
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

12. GOVERNMENT REGULATION ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
6) Subsidy
The government sets a subsidy of € 0,20
The new supply = ………………………………
Calculate the new market equilibrium
What is the % of the subsidy paid to the consumer?
Calculate the cost for the government
GOVERNMENT REGULATION ON COMPETITIVE MARKETS
What are competitive markets?

13. Vocabulary What are competitive markets?
Copyright Mark Van Couwenberghe, 2017
Vocabulary
What are competitive markets?
PRICE MECHANISM ON COMPETITIVE MARKETS

14. What are competitive markets? PRICE MECHANISM ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
What are competitive markets?
PRICE MECHANISM ON COMPETITIVE MARKETS

15. What are competitive markets? PRICE MECHANISM ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
What are competitive markets?
PRICE MECHANISM ON COMPETITIVE MARKETS

16. What are competitive markets? PRICE MECHANISM ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
What are competitive markets?
PRICE MECHANISM ON COMPETITIVE MARKETS

17. What are competitive markets? PRICE MECHANISM ON COMPETITIVE MARKETS
Copyright Mark Van Couwenberghe, 2017
What are competitive markets?
PRICE MECHANISM ON COMPETITIVE MARKETS