Market distortion by government,forms of intervention-price ceiling,price floor,quantity restrictions, tax and subsidies,pros and cons of market distortion

2. WHAT IS MARKET DISTORTION ?
• AN ECONOMIC SCENARIO THAT OCCURS WHEN
THERE IS AN INTERVENTION IN A GIVEN MARKET
BY A GOVERNING BODY.
Why it Matters?
Market distortions are a byproduct of
government policies that aim to protect and
raise the general well-being of
all market participants.

3. PRICE CEILING
WHY PRICE CEILING SET
?
Price ceilings are regulations designed to protect low
income individuals from not being able to afford important
resources. However, many economists question their
effectiveness for several reasons. For example , price
ceilings will have no effect if the equilibrium price of the
good is below the ceiling.
A price ceiling is a government-imposed price control
or limit on how high a price is charged for a product.
Governments intend price ceilings to protect
consumers from conditions that could make necessary
commodities unattainable.

4. Designed to help consumers illegal to charge
higher than the price
Example : Rent control problems .

5. PRICE FLOOR
Price floor is a situation when the price charged is more than or less than the
equilibrium price determined by market forces of demand and supply.
Four common
effects1.Surplus
2.Wasteful increase in quantity
3.Loss gains from trade
4.Misallocation of resources

6. How do price floors create surplus?
A significant surplus can result from
a binding price floor. On a graph of
the supply and demand curves, the
supply and demand curve intersect
at the equilibrium -- the point where
the quantity demanded by people
and businesses equals the quantity
supplied by those bringing goods to
market
Example
minimum wage laws

7.  A benefit given by the government usually in
the form of a cash payment or tax reduction
 Subsidization occurs whenever the
government uses its power to redistribute
wealth or access
 It is often considered to be in the interest of
the public
TAX AND SUBSIDIES

8.  One means of correcting market distortions
 Can be used to correct externalities that create
relative distortions between this industry and
others or within this industry
 Affects price, output, demand, supply and profit
 Examples: Subsidies to farmers, LPG Subsidies,
Entertainment tax, VAT etc

9. Quantity restrictions
• Quantity restriction increases consumer surplus, but decreases producer
surplus.
• To have a better understanding we will take the example of advertising
market which will help us understand the topic in a better way.
• Thus quantity restriction should be seen as complimentary situation for
competition and regulation of advertising.
• One can always avoid the disturbance due to advertisements by using
digital recording.
• The thing what confuses most of the economic theorist for a long time is
that the tight competition between the advertisers reduces the prices of
the but again due to quantity restrictions (advertisement quantity
reduction )the advertising charges again increases adversely.
• The general mode of applying the cap is through tax modulation.
Whenever tax is reduced leads to higher advertising quantities. Thus
creating competency among the advertisers.

10. QUANTITY RESTRICTION GRAPH

11. IMPORT RESTRICTIONS

12. EXPORT RESTRICTIONS

13. MARKET DISTORTION BY GOVT. GOOD OR
BAD?
•MARKET FAILURE
•RESTRICTION ON FREE
COMPETITION
•SHORTAGES AND SURPLUSES
•PROTECTION OF INEFFICIENT
FIRMS
•MORAL HAZARD
• SOCIETY’S WELFARE
• WORKER’S WELFARE
• SUPPORT FOR DOMESTIC
PRODUCERS
• SUSTAINING AGRICULTURE
• TO GAIN ADVANTAGEOUS
POSITION IN THE
INTERNATIONAL MARKET