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Government Intervention In Markets

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Government Intervention In Markets

  1. 1. Government Intervention in Markets
  2. 2. Main Objectives <ul><li>Respond to market failures </li></ul><ul><li>Abuses of market power </li></ul><ul><li>Improve economic efficiency </li></ul><ul><li>Equitable distribution of income and wealth </li></ul>
  3. 3. Selected Forms of Government Intervention <ul><li>Ceiling price – when the government believes the price for an item is too high </li></ul><ul><li>Floor price – when the government believes the price of an item is too low </li></ul><ul><li>Subsidy or Quota – when the government believes it must intervene for social or environmental reasons </li></ul>
  4. 4. Price Ceilings <ul><li>A restriction placed by a government in order to prevent the price of a product from rising above a certain level. </li></ul><ul><li>Price is set below the market clearing price (quantity demanded > quantity supplied) </li></ul><ul><li>Three possible outcomes: </li></ul><ul><ul><li>Shortages </li></ul></ul><ul><ul><li>Creation of a black market </li></ul></ul><ul><ul><li>Quality decreases </li></ul></ul>
  5. 5. Rent Control Short Run Quantity Price Price Ceiling New Quantity Demanded
  6. 6. Rent Control Long Run Q Price Price Ceiling Quantity Demanded Quantity Supplied
  7. 7. Floor Prices <ul><li>A restriction that prevents a price from falling below a certain level. </li></ul><ul><li>Price is set above the market clearing price (quantity demanded < quantity supplied) </li></ul><ul><li>Two problems: </li></ul><ul><ul><li>What to do with the resulting surplus </li></ul></ul><ul><ul><li>Consumers pay a higher price and receive less </li></ul></ul>
  8. 8. Minimum Wage Labour Demanded Labour Supplied Labour Supplied Labour Demanded Q Price Minimum Wage (Price Floor)
  9. 9. Subsidies <ul><li>A subsidy is a grant of money made to a particular industry by the government. </li></ul>What consumers now pay Quantity Price Subsidy Price producers receive
  10. 10. Subsidies <ul><li>Buyers get lower prices, sellers extra revenue </li></ul><ul><li>More product is exchanged </li></ul><ul><li>Criticisms: </li></ul><ul><ul><li>Paid for by taxpayers </li></ul></ul><ul><ul><li>Keeps inefficient producers in business </li></ul></ul><ul><ul><li>Barrier to free trade </li></ul></ul>
  11. 11. Quotas <ul><li>A restriction placed on the amount of product that individual producers are allowed to produce </li></ul><ul><li>Administered by marketing boards </li></ul><ul><li>Shifts the supply curve to the left </li></ul><ul><li>Works best with inelastic goods (change in price greater than change in quantity) </li></ul><ul><li>Most meat, vegetables, diary products in Canada are sold through marketing boards </li></ul>

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