Lect 1-Pr Controls

8/17/2019 Lect 1-Pr Controls

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Government

MicroeconomicIntervention

Lecture 18

Maximum and MinimumPrices



At the end of the lecture you should beable

to :

Explain the meaning and effect on the market of

maximum and minimum prices

Government

MicroeconomicIntervention



Government Intervention in

Markets• The justication for intervention is

usually where there is market failure – a

situation where the market fails tomake the best use of scarce resources.

• orms of !overnment intervention:

•

"e!ulations• inancial intervention: use of ta#es

and subsidies

• Government $rovision



Government Intervention in

Markets• "e!ulations

• %arious means by which !overnments

seeks to control $roduction andconsum$tion

• Im$ortant in combatin! environmental$roblems – e!: re!ulation to $rohibit

e#cessive levels of $ollution bychemical industries

• May also refer to $rices – e!: $ricecontrols such as minimum wa!e

le!islation& ma#imum $rice



Government Intervention inMarkets

• inancial intervention: use of ta#es andsubsidies

• Taxes – char!es im$osed by!overnments on incomes& $rots andsome ty$es of consumer !oods andservices to fund !overnmente#$enditure

• '!: indirect ta#es on demerit !oods

• Subsidies – a direct $ayment by the!overnment to a $roducer& make the

$rice $aid by consumers less than itshould be.



Government Intervention inMarkets

• Government $rovision

• Government directly $rovide !oods andservices to the $ublic – state owned

industries or nationalised industries suchas electricity !eneration& coal minin!&water $rovision).

• *ut durin! the +,-s and +,,s there was

a major shift towards $rivati/ation – manyformer state owned industries were sold tonew $rivate owners

• (ome !oods and services are $roduced byboth the state and the $rivate sectors. '!:education and health care



Government Intervention tostabilise prices: Price

Controlsa0 Ma#imum 1rices

price

quantity0

D

D

S

S

Maximum

Price

(ceiling price)

P

Pm

QQ1 Q2



Ma#imum 1rices 2 only valid in marketswhere the ma#imum $rice that is im$osedis below the normal e3uilibrium $rice asdetermined in a free market.

Also known as $rice ceilin! – the $rice isnot allowed to rise above this level

4 althou!h it is allowed to fall below it0 Governments use le!islation to enforce

ma#imum $rices for: 2 sta$le foodstu5s – bread& rice& su!ar

2 rents in certain ty$es of housin! 2 trans$ort fares where a subsidy isbein!

$aid



"easons for ma#imum $rice:

airness

In wartime or times of famine

*asic food items – a5ordable for the$oor



'5ects of ma#imum $rice:

'#cess demand of 6+6 7 – !ivin! rise toblack market

8ill benet some consumers who are ableto !et the !oods at the controlled $rice 9isadvanta!e to those who are $re$ared

to $ay a hi!her $rice but unable to obtain

it "educe the 3uantity $roduced of an

already scarce commodity



9istribution of !oods:

"ationin!

irst come& rst serve – lon! 3ueues

Givin! $reference to re!ular customers

8aitin! list



Government intervention: 'ncoura!e su$$ly: by drawin! on stores

4e! via bu5er stock schemes0& direct

!overnment $roduction& or by !ivin!subsidies or ta# relief to rms

"educe demand: $roduce morealternatives& control $eo$les income

4e!.via income stabili/ation schemes0.



b0 Minimum 1rices

Price

quantity

S

S

D

DQ1

Q2

Minimum

price

0



Minimum $rices

A $rice ;oor set by the !overnment

1rice is not allowed to fall below this level

4althou!h it is allowed to rise above it0



"easons for minimum $rice:

To $rotect $roducers income – su$$ly;uctuations& demand is $rice inelastic:severe $rice ;uctuations. 1revents a fall

in $roducers income durin! $eriods oflow $rices

To create a sur$lus – $eriods of !lut&

stored for future shorta!es Min wa!es – $revent workers income

from fallin! below a certain level



1roblems of minimum $rices: <reates sur$lus

irms may evade the $rice control or cut

$rices to reduce the sur$lus <ushions ine=ciency



Government intervention – sur$luses:

*uy the sur$lus and either store it&destroy it or e#$ort it

(u$$ly articially lowered – im$ose3uota

Increase demand – advertise& nd

alternative uses& reduce availability ofsubstitutes 4 by im$osin! ta#es or3uotas0



TH !"

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Lect 1-Pr Controls