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Questions and Answers
What is one of the main objectives of government intervention in the market?
What is one of the main objectives of government intervention in the market?
What is a potential consequence of implementing a price ceiling?
What is a potential consequence of implementing a price ceiling?
Which of the following is considered a drawback of government intervention in the market?
Which of the following is considered a drawback of government intervention in the market?
What is the purpose of a minimum price policy (price floor)?
What is the purpose of a minimum price policy (price floor)?
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Which of the following forms of government intervention aims to stabilize prices?
Which of the following forms of government intervention aims to stabilize prices?
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Study Notes
Government Intervention in Markets
- Governments intervene in markets when equilibrium price (EP) and equilibrium quantity (EQ) are not optimal for consumers and producers, or do not represent a socially optimal outcome.
Objectives of Government Intervention
- Establishing fair prices for goods.
- Generating income for the market.
- Regulating consumption and production.
- Ensuring sufficient quantity exchange.
Drawbacks of Government Intervention
- Creating market inefficiencies.
- Reducing competition.
- Disrupting natural market behaviours and outcomes.
Forms of Government Intervention
- Price control.
- Price stabilization.
- Taxation.
- Subsidies.
Price Control Policies
- Setting minimum or maximum prices for goods to be sold.
- Temporarily suspending the price mechanism, leading to artificial prices.
- Two main types: price ceilings and price floors.
Price Ceiling (Maximum Price Policy)
- Government sets the highest allowable price for a good.
- Effective when the maximum price is below equilibrium price (EP).
- Selling above the maximum price is illegal.
- Aims to reduce prices when EP is unfavorable to consumers.
Effects of Price Ceiling
- Creates excess demand (shortage).
- Facilitates black markets.
- Encourages alternative distribution methods.
- Discourages investment in affected industries.
- Increases consumer surplus, decreases producer surplus and overall economic surplus.
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Description
This quiz explores the various aspects of government intervention in markets, including its objectives, drawbacks, and the different forms it takes, such as price controls and subsidies. Understand how these interventions affect market equilibrium and overall economic efficiency.
