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Price Mechanism and its Application (Government Intervention) - Coggle…

- - - - Affordability & fairness. In times of war / famine, gov may set maximum prices for basic goods to allow some of the poor to buy a good that they would otherwise be unable to afford or prevent exploitation by suppliers who may charge a high price during such times of shortages.
        
        As an anti-inflationary policy i.e. to prevent continuous increase in prices of many products which could be detrimental to
        economic growth & people’s standard of living.
    - - The goods and services will be made more affordable to those who previously could not afford them.
        
        But, The resulting shortage would result in an inefficient allocation of resources since societal welfare is reduced as illustrated by the deadweight loss area.
        
        Emergence of black markets where goods are sold illegally at market prices above the legislated maximum market prices.
        
        Allocation of the good or service on a ‘first-come, first-served’ basis, which is likely to lead to queues developing, or firms adopting waiting lists. Consumers would thus also incur the additional opportunity cost of extra time spent searching or waiting for the good or service.
        
        The issue of fairness will be a problem as those who need it most may not be amongst the first in line. Even if they are, then there is the issue of time and resources wasted in queuing much earlier than necessary.
        
        Firms deciding which customers should be allowed to buy, for example, by giving preference to regular customers.
        
        Rationing through the issue of coupons which can also be administratively expensive.
  - - - To protect producers’ (eg. farmers) incomes. If the industry is subjected to price fluctuations, minimum prices would prevent producers’ income from falling during periods of low demand (relative to supply) though this may have the opposite effect of lowering their income since quantity transacted would decrease.
        
        In the case of wages, minimum wage legislation can be used to prevent wage rates from falling below a certain level, hence ensuring an acceptable level of living standards.
        
        To prevent some ppl from consuming the product
    - - Higher revenue for producer
        
        May cause a fall in producer’s revenue if gov didn’t buy all the surplus and if PED>1.
        
        The artificially high prices may cushion inefficiency. Firms may feel less need to find more efficient methods of production and to cut their costs if their profits are being protected by the legislated minimum market prices which are higher than the free market equilibrium prices.
        
        Also the high price may discourage firms from producing alternative goods which they could produce more efficiently or which are in higher demand, but nevertheless have a lower free market price.
- - - - To reduce consumption of certain goods that it deems to be overconsumed and potentially harmful to society. For example, overconsumption of cars, leading to excessive pollution and traffic congestion and hence the introduction of the Vehicle Quota System and COEs.
        
        To protect domestic industries from foreign competition by restricting the quantity of foreign imports legally allowed to be supplied in the country.
    - - Setting a quota below the free market equilibrium quantity,
        decreases consumption of the good and raises its prevailing market price, ceteris paribus. This enables the government to reduce the consumption of certain goods, by restricting the quantity available in the market and raising the market equilibrium price.