Government Interventions Pt.2: Maximum and Minimum price policies, Regulation/Law Flashcards
Maximum Price Policy ( Ceiling Price )
The highest possible price that a firm could charge above which is illegal.
How?
Price maximum is set below the equilibrium
Evaluation of Maximum Price Policy
1) Shortage:
As price falls, Quantity Demanded increases according to the law of demand. However, Quantity Supplied decreases as to the law of supply. Therefore as QD is higher than QS, this creates a shortage where QD minus QS.
2) Price Black Market:
People who desperate to purchase the product but didn’t manage to would go into Black Markets that still have the product to purchase it. But they would pay P black market which is the highest possible price that they are willing to pay.
3) Unemployment:
As firms gain less per product, this leads to a decrease in revenue which encourages or forces them to let go of redundant workers.
4) Hefty Maintenance:
Government will increase huge costs due to enforcements such as raids and checks.
Minimum Price Policy ( Floor Price )
Lowest price charged for a good which below it cannot fall.
How?
Price Minimum is set above the market equilibrium. To decrease consumption of demerit goods, help protect the revenue of agricultural produce, minimum wage and etc.
Evaluation of Minimum Price Policy
1) Income may rise at the same time, able to purchase still.
2) PED:
Goods with low PED (<1) such as cigarettes will still be purchased. Unless its high, the % change in QD will still be lower than the % change in price.
3) Longevity of price increase:
As consumers get used to high prices, their old habit returns making the policy redundant.
4) Black Market:
Switch to smuggled cigarettes that aren’t regulated as the prices are cheaper (Illegal).
5) Info Failure:
May not know how much they should increase the price.
Regulation/Law
Government intervention through the form rules and legislation, backed by the use of penalties that are intended to modify the economic behaviour of individuals and firms.
Direct Government Provision
To help solve market failures like absence of public goods as well as underprovision and underconsumption of merit goods.
Advantages and Disadvantages (Eva) of Direct Government Provision
Adv:
1) Public goods in demand will provided up to the socially efficient level. This increases the welfare of the people.
2) Public services will be made affordable to all people as there is no profit motive.
Dis:
1) Info failure, may not be able to determine the sufficient amount of public and merit good to produce.
2) Provision of services are extremely costly. The government may need to increase taxes.
3) Overconsumption. Some people may abuse public goods such as healthcare which limits the people who genuinely need it.
Provision of Information
The objective is to decrease information failure through awareness with education campaigns and advertisements.
Evaluation
1) Habits and Opp cost:
Hard to change the behaviour of people, the government required to spend heavily over the long term to ensure the effectiveness of that campaign. Opportunity cost as those funds could have instead been used for subsidies to encourage the use of promoted goods.
