eGr12TG Econ-pages-2 (1) PDF

Competency 3 :- Investigates the government intervention to the market. Competency Level 3.1 :- Analyses the ways the government intervenes to a market. Number of Periods: 02 Expected Learnings Outcomes :-  Shows the ways of government intervention to a market. A Guidelin...

Competency 3 :- Investigates the government intervention to the market. Competency Level 3.1 :- Analyses the ways the government intervenes to a market. Number of Periods: 02 Expected Learnings Outcomes :-  Shows the ways of government intervention to a market. A Guidelines to Explain the Subject Matters:  The market equilibrium determined by the demand and supply forces, perform an important duty within the society in producing and distributing goods and services.  However when looking at market equilibrium from a social and political point of view some believe market equilibrium is as unfavourable to the society.  Because of this reason the government intervenes to the market in various ways.  The main ways of government intervention are as follows.  Imposing of taxes  Providing of subsidies  Price control  Price stabilization  One of the most popular ways of government intervention into a market economy is the imposing of taxes on producers and consumers.  Government impose taxes with different interventions. There are two forms of imposing taxes. These two forms are, imposing a certain numbers of rupees over a unit of goods produced or consumed and imposing a particular percentage of the value of the goods as a tax.  Any form of the above mentioned tax will increase the cost of production of producers and it will shift the supply curve to the left. 111  In this way as the demand and supply situation changes due to the imposition of taxes the market equilibrium is determined through demand and supply forces also changed.  Similar to imposing of taxes government also provide subsidies to consumers and producers.  As demand and supply changes due to the provision of subsidies the market equilibrium determined by demand and supply forces also changed.  Other than taxes and subsidies, government change equilibrium values through price policies.  Today it is common for most governments to introduce controlled prices under price policies.  In this government intervenes to the price determination through laws and market mechanism is neutralized then.  Price controlled policies implemented through laws are of two types  Deciding of maximum price  Deciding of minimum price  When prices of goods fluctuate frequently price instabilities are occurred. Aiming to prevent those price instabilities government implement various price stabilization policies. 112 Competency Level 3.2 :- Analyses government intervention in the free market through a unit tax. Number of periods :- 08 Expected learning outcomes:  Names the ways of imposing taxes on products.  Defines a proportional tax.  Defines a unit tax.  Shows the effect on supply curve when imposing a unit tax over a supplier.  Shows impact of a unit tax on market equilibrium when imposing a unit tax over a supplier through demand and supply schedule.  Shows impact of a unit tax on market equilibrium when imposing a unit tax over a supplier through demand and supply curve.  Presents impact of unit tax on market equilibrium when imposing a unit tax over a supplier through demand and supply equations.  Analyses welfare effect of a unit tax.  Explains imposing of a tax over consumers. Instructions for Lesson Planning:  The government decided to impose Rs.5 tax for 1Kg. of imported potatoes to protect domestic potato suppliers.  Ask the ideas of students about the statement.  Conduct a discussion highlighting the following facts.  Imposing taxes on suppliers and consumers can be considered as a common situation where government intervenes to the market activities.  Government imposes taxes with various objectives.  There are two forms of taxes imposed on goods and services.  Proportional tax or ad-valorem tax  Specific tax or unit tax  Group the students in a proper way and , provide instructions to do the activity 113 Proposed Instructions for Learning:  Pay attention to the pair of demand and supply equations given to you among the following equations.  Qd= 100 – 2P and Qs = -60 + 3P  Qd= 40 – 5P and Qs = -10 + 5P  Construct demand and supply schedules with same prices by using the equations which you have received.  Create demand and supply curves in a graph according to your schedules.  Calculate the market equilibrium price and quantity, consumer surplus and producer surplus.  Assume that the government charge Rs 2.00 tax from each unit sells.  Using the before prices, construct the new supply schedule after tax according to new supply equation of Qst = a+b(P - 2).  Crate the new supply curve in the same graph according to the new supply schedule.  Calculate the new equilibrium price, quantity, producer surplus, and consumer surplus after the tax.  Compare the market situations before tax and after. A Guidelines to Explain the Subject Matters:  Imposing taxes on consumers and producers can be considered as a common situation of government intervention to the market process.  There are two forms of the taxes imposed on goods and services.  Proportional tax or ad-valorem tax  Specific tax or unit tax  Imposing a particular percentage of a tax based on the value of product produced or consumed is known as ad-valorem tax. Example: 2% tax on the value of 1 Kg. of sugar. 114   Imposing taxes on a unit of a product produced or consumed is known as a unit tax or as a specific tax.  Example.  Imposing of Rs. 10tax per one Kilogram of sugar.  Imposing of Rs. 2tax per loaf of bread.  Imposing of Rs 3 per one meter of cloths.  When imposing taxes on supplier, the cost of production increases.  As a result supply decreases and the supply curve shift to left side by the same amount of tax.  After implementing a unit tax , the influence on market equilibrium can be shown with the schedule, graph and equations.  When imposing a unit tax over a supplier it can be adjusted to the supply schedule, supply curve and supply equation as below.  Following is a demand and supply schedule of a certain goods at a competitive market. Price (Rs.) Quantity supplied 0 0 5 10 10 20 15 30 20 40 25 50 30 60 35 70 40 80 Think that the government imposes a Rs 5 unit tax for this good. Because of this new market supply schedule can be shown as follows. 115 Price Unit tax Price after tax Quantity supplied 0 5 5 0 5 5 10 10 10 5 15 20 15 5 20 30 20 5 25 40 25 5 30 50 30 5 35 60 35 5 40 70 40 5 45 80  Above schedule shows decrease in supply after the unit tax as cost of production increases with the unit tax.  Information before and after unit tax can be shown by a graph as below. P 40 S1 S 35 30 25 22.5 0 20 17.50 15 10 5 D Q 0 10 20 30 35 40 50 60 70 80  Because of the Rs5 tax imposed over the producer the supply curve shifted to the left side and equilibrium changed accordingly. 116   Before tax, Equilibrium price =Rs 20 Equilibrium Quantity = 40 units  After tax Equilibrium price =Rs 22.50 Equilibrium Quantity = 35 units  Welfare effect also occurs in addition to the change in equilibrium after the tax.  The welfare effect can be identified by the following graph. P S1 40 S 35 30 25 22.50 A E 20 B C D E H GF 17.50 15 I J 10 5 K Q D 0 10 20 30 35 40 50 60 70 80 before tax, Consumer surplus 117 Consumer surplus = (Maximum demand price- equlibrium price ) x equlibrium quntity 2 Consumer surplus Producer surplus Economic surplus 400 + 400 After tax Consumer surplus Producer surplus Economic surplus // (iii) Loss of consumer surplus due to the tax 118  // Loss of producer surplus due to the tax = 93.75// = 187.50// (ii) Loss of economic surplus due t the tax = Before tax economic surplus – (After tax economic surplus) = 800-612.50 = 187.50// (iv) Government revenue = Amount of unit tax x new equilibrium quantity (v)Tax burden of the consumer = Equilibrium price before tax - Equilibrium price after tax = 20-22.50 = 2.50 Tax burden for consumer 119 (vi) Tax burden for producer = 2.50/= Producer tax burden (vii) Both producer’s and consumer’s tax burden  The sum of total tax burden of both consumer and producer is equal to government tax revenue)  Dead weight loss is the Rs. 12.50  (viii) Dead weight loss is equal to area of D+F  Dead weight loss = Loss of the economic surplus - Government revenue = B+C+H+G-(B+C+D) +(H+G+F) = 12.50/=  Economic effects of imposing a unit tax can also be measured by equations. Following above example and supply equations before tax are as follows. 120  Therefore, equilibrium before tax p = 20 after substituting the price for equation 80 - 2x20 80 = 4P =40 20 = P Equilibrium quantity =40 units  Equilibrium price =Rs20  Imposing taxes for producers is a cost for them and it can be indicated as below.  Equilibrium after tax p = 22.50, o Equilibrium price after tax, = 22.50 o Equilibrium quantity after tax,  Other economic effects can also be presented by demand and supply equations.  Imposing a unit tax over consumers means charging of a certain amount of rupees per unit of goods at a situation of purchasing goods by the consumer.  Example : Sales tax, VAT 121  At a situation of this as the tax is charged at the point of purchasing the goods, the total amount of tax is legally paid by the consumer.  If Rs. 10 sales tax is charged over one unit of oranges, at each situations of purchasing oranges Rs.10 tax should be paid to the government.  When imposing a unit tax over a consumer it does not have any effect over the supply curve.  However, as the price that should be paid by the consumer increases after the tax the price willing to be paid by the consumer decreases for the units they purchased. Therefore, demand curve shifts to the left at the same prices existed.  Following diagram shows change in equilibrium when a unit tax is imposed over a consumer.      According to above diagram equilibrium before the unit tax imposed over consumer is shown by the point E0. At that point equilibrium price is P0 and equilibrium quantity is Q0. New equilibrium after the unit tax imposed over the consumer is shown by the point E1. At that point equilibrium price is P1 and equilibrium quantity is Q1. 122 Competency Level 3.3 :- Analyses the distribution of incidence of tax after the unit tax is imposed on supplier. Number of periods :- 04 Expected learning outcomes: Defines incidence of tax. Describes the distribution of incidence of tax between consumer and producer based on the type of price elasticity of demand and supply. A Guidelines to Explain the Subject Matters:  When imposing a tax over a producer the main factor which affects tax incidence is the demand and supply elasticity.  Tax incidence at various situations of demand elasticity can be shown by the graphs below.  Situation of perfectly inelastic demand:- S1 S P2 b The amount of specific tax a P1 0 Q  According to the above graph supply curve before tax is depicted by the curve S and supply curve after tax is depicted by the curve S1.  Equilibrium before tax is depicted by the point a and equilibrium the after tax is depicted by point b.  Amount of unit tax is shown by the gap of a-b and increase in equilibrium price is also shown by the same gap. Which means a - b = P1 - P2  At a situation of perfectly inelastic demand increase in equilibrium price by the same amount of unit tax shows that the total burden of tax should be borne by the consumer.  The shaded area of A shows the total tax burden of the consumer. 123 Situation of perfectly elastic demand:- P(Rs.) S P1 a c P2 D Unit tax P1 b 0 Q Q1 Q  Due to unit tax supply curve shifted from S to S1  Equilibrium before tax is shown by the point C and equilibrium after the tax is shown by the point a.  Due to the imposition of tax equilibrium the quantity reduced from Q to Q1 and there is no change in the equilibrium price.  Price before the tax is same as the price after tax which is P2.  This means there is no change in the price paid by the consumer.  Due to this the price received by the producer has decreased by the amount of unit tax(a-b) from P2 to P1.  Therefore the area of tax burden shown by B will have to be borne by the producer. Situation of unitary elastic demand:- S1 P(Rs.) P2 P c Unit tax P1 0 Q(Units) 124  In above graph point C shows equilibrium before tax and point a shows equilibrium after tax.  Gap between a and b shows the amount of unit tax and in this situation the burden of tax is distributed between consumer and producer is equal.  In this regard distance from P-P2 shows the tax burden of the consumer and distance from P-P1 shows the tax burden of the producer.  Therefore the shaded area A shows the consumer’s tax burden and the shaded area B shows the producer’s tax burden.  Situation of inelastic demand:- P(Rs.) S1 S P2 a A Unit Tax P c B P1 b D 0 Q(units) Q  According to the above graph point C shows the equilibrium before tax and point a shows equilibrium after tax.  Distance from a to b shows the amount of unit tax while the amount of P-P2 shows tax burden of the consumer and P-P1 shows tax burden of the producer.  Accordingly less tax burden for consumer shows by the area A and more tax burden is for producer which shows by the area B.  Therefore at a situation of inelastic demand consumers bear most of the tax burden as shown by the shaded area A and producers bear less of the tax burden as shown by the area of B. 125 Situation of elastic demand:- S1 P(Rs.) S P2 a A P C B Unit tax P1 b Q1 Q Q(units)  According to the above graph point C shows equilibrium before tax and point a shows equilibrium after tax.  Distance between a and b shows the amount of unit tax and in this situation consumer’s tax burden is shown by the distance of P to P2 and producer’s tax burden is shown by the distance of P to P1.  Therefore less burden of tax shown by the area of A holds by the consumer and more burden of tax shown by the area of B holds by the producer.  Incidence of tax at various situations of supply elasticity can be shown by the graphs below. Situation of perfectly inelastic supply:- S P(Rs.) ñ, ^re& P a B P1 b D 0 Q(units) 126   When imposing a unit tax over a a perfectly inelastic supply the supply curve remains constant.  Due to this there will not be any change in equilibrium before and after the tax. Point a shows equilibrium before and after tax.  In this situation there is no change in the price paid by the consumer. Also the equilibrium price before and after is depicted by the letter P.  Therefore by the distance of a-b the price received by the producer is decreased and the price reduced from P to P1.  Following this the whole area of tax burden shown by B is borne by the producer. Situation of a perfectly elastic supply:- P(Rs.) P1 b S1 A1 Specific tax P a S 0 Q(units0 Q1 Q  According to the graph above point a shows equilibrium before tax and point b shows equilibrium after tax.  Distance from b to c shows the amount of unit tax and the price paid by consumer or the equilibrium price increased by the same amount.  This indicates that the total burden of tax shown by the area of A is borne by the consumer at a situation of s perfectly elastic supply. 127 Situation of unitary elastic supply:- P(Rs.) P1 b S1 A1 Unit tax P a S 0 Q(units) Q1 Q  According to the above graph point a shows equilibrium before tax and point b shows equilibrium after tax.  Distance from b to c shows the amount of unit tax and the burden of tax distributed between consumer and producer is equal.(P-P2- Producer P-P1- Consumer)  The area of A shows consumer’s tax burden and area of B shows producer’s tax burden. Situation of inelastic supply:- S1 P(Rs.) S b P2 P a Unit Tax P1 c D 0 Q(units) Q1 Q 128   According to the above graph point a shows equilibrium before tax and point b shows equilibrium after tax.  Distance from b to c shows the amount of unit tax and P to P2 shows consumer’s tax burden and P to P1 shows producer’s tax burden.  Therefore less burden of tax is shown by the area of A which will be borne by the consumer and more burden of tax is shown by the area of B which will be borne by the producer. Situation of Elastic supply:- S1 P (( P2 b Unit tax A a P B c 0 Q Q1 Q  Equilibrium before tax is shown by point a and equilibrium after tax is shown by point b.  Distance from B to C shows the amount of unit tax and P to P2 shows the tax burden of the consumer and P to P1 shows the tax burden of the producer.  Therefore, more burden of tax shown by the area of A will be borne by the consumer and less burden of tax shown by the area of B will be borne by the producer. 129 Competency Level 3.4 : Analyses the government intervention to the market with providing of a unit subsidy ever supplier. Number of Periods : 08 Expected Learning Outcomes :  Defines the unit subsidy given to a supplier.  Analyses the effect over market equilibrium when providing a unit subsidy over a supplier with the demand and supply schedules.  Analyses the effect over market equilibrium when providing a unit subsidy over a supplier with the demand and supply curves.  Analyses the effect over market equilibrium when providing a unit subsidy over a supplier with the demand and supply equations.  Analyses the welfare effect of a unit subsidy using graphs. Instructions for Lesson Planning :  Present the statement of Government decides to provide fertilizer subsidy for paddy farmers to the students.  Inquires students’ ideas related to the statement.  Conduct a discussion highlighting the following facts.  Providing of subsidies over suppliers is done by the government.  Government provides subsidies on various objectives.  There are two forms of subsidies  Ad valerom subsidy  Unit subsidy  Group students appropriately and engage them in the following activity. 130 Proposed Instructions for Learning:  Pay attention to the pair of demand and supply equations assigned to your group, from the pair of demand and supply equations given below.  Qd= 100-2P and Qs= -60+3P  Qd= 40-2P and Qs= -10+3P  Construct demand and supply schedules on same prices using the pair of demand and supply equations given to you.  Draw demand and supply curves on the same diagram with the use of demand and supply schedules constructed by you.  Calculate market equilibrium price, quantity, consumer surplus and producer surplus.  Consider that the government provides a unit subsidy of Rs. 2.00 over this good.  Construct new supply schedule after the subsidy on same prices used before considering new supply equations as Qs=a+b(P+2)  Draw new supply curve relevant to the supply schedule on the same diagram draw before.  Calculate market equilibrium price, quantity, consumer surplus and producer surplus after the subsidy with the use of that diagram.  Compare between market situations of before the subsidy and after the subsidy using information found by you. A Guidelines to Explain the Subject Matters:  Providing a certain amount of rupees as a subsidy to the producers who produce one unit of a product is called a unit subsidy of suppliers Example : Providing Rs. 10 subsidy per one 1Kg. of tea.  Definite result of providing a unit subsidy is the decrease in cost of production.  Due to this supply increases and supply curve shifts to the right by the amount of unit subsidy. 131  After providing a unit subsidy, the influence on market equilibrium can be shown with a supply schedule, supply curve and supply equation is shown below.  Demand and supply schedules relevant to a particular good sells at a competitive market is given below. Price(Rs,) Quantity demanded Quantity supplied (units) (units) 0 80 0 5 70 10 10 60 20 15 50 30 20 40 40 25 30 50 30 20 60 35 10 70 40 0 80  Assume that the government is providing Rs. 5subsidy over each unit of this good. The new supply schedule after providing the subsidy is as fallows. Qd= 80-2P Qd= 0+2P 132  Price Rs. Unit subsidy(Rs.) Price after the Quantity subsidy(Rs.) supplied Unit 0 5 -5 0 5 5 0 10 10 5 5 20 15 5 10 30 20 5 15 40 25 5 20 50 30 5 25 60 35 5 30 70 40 5 35 80  As the cost of production decreases with unit subsidy the resulting increase of supply is explained by the schedule above.  The information revealed by the schedule relating to the providing of a subsidy can also be shown by a curve as below.  Due to providing of a unit subsidy supply curve shifts to the right from 133  S to S1 by the amount of unit subsidy. Equilibrium before the subsidy Equilibrium Price = Rs. 20 Equilibrium quantity = unit 40 Equilibrium after the subsidy Equilibrium Price = Rs. 17.50 Equilibrium quantity = unit 45  Other than change in equilibrium shown by the graph above, some other effects also arises with providing of a unit subsidy over producers.  Those welfare effects can also be identified with the use of a graph as below.  134 III Increase in consumer surplus due 135  to the subsidy = (A+B+I+H+G) –(A+B) =I+H+G = 506.25- 400 = Rs. 106.25 Increase in producer surplus due to the subsidy = (B+C+I+J) – (I+J) = B+C = 506.25 – 400 = Rs.106.25 Increase in economic surplus due = (I+H+G)+(B+C) to the subsidy(I method) = 106.25+ 106.25 = Rs.212.50 (II Method) Increase in economic = Before subsidy Economic surplus – After subsidy Economic surplus surplus due to the subsidy =1012.50- 800 = Rs. 212.50 Cost of government due to subsidy = B+C+I+H+G+F (Method I) = Rs. 5 X 45 = Rs. 12.50 Effect over social = Increase in Increase in Cost of consumer + producer - government welfare surplus surplus due to the subsidy = (I+H+G) +B+C –(B+C+I+H+G+F) = 106.25+106.25-225 =Rs.12.50 (Method II) 136  Economic effects arises with providing of a subsidy can also be explained with the use of equations.  According to above example considered demand and supply equations before the subsidy are as follows. Qd = 80- 2P Qs = 0 + 2P  Equilibrium before the subsidy, 80 – 2P = 0+ 2P 80 = 4P 20 = P Equilibrium price = 20 Equilibrium quantity= 80 –(2X20) = 40(Units) Equilibrium price = Rs. 17.50 Equilibrium quantity= 10 +(2X17.50) Unit 45 (Other economic effects of a unit subsidy can also be examined by using equations.) 137 Competency Level 3.5 : Investigates the effects of price control on market operations. Number of Periods : 08 Expected Learning Outcomes :  Defines the price control.  Names out the different forms of price control.  Defines the maximum price policy and demonstrates with demand and supply curves.  Analyses the economic effects of maximum price policy.  Describes the arrangements to make maximum price policy meaningful.  Defines the minimum price policy and demonstrates by demand and supply curves.  Presents the economic effects of minimum price policy.  Describes the arrangements to make minimum price policy meaningful.  Introduces the procedures for price stabilization. A Guidelines to Explain the Subject Matters:  The prices of good or services which determined by the forces of demand and supply would not be fair to consumers and producers.  In this situations government control the market price.  The price control is creating of an artificial price at the market by the government using rule and regulations.  Government aim is to protect producers and consumers by the price control.  There are two types of price control. 1. Maximum price – ceiling price 2. Minimum price – floor price  When the government think that market equilibrium is unfair for consumers to give them fairness the legal price decided by the government is called maximum price.  It is better to implement the maximum price lower the equilibrium price as the aim of deciding maximum price is to provide fairness for the consumers. 138  Such maximum price decided lower the equilibrium price is called as an effective maximum price. Examples : implementing maximum price for Rice, Bread, Sugar and Dhal, Deciding of maximum rent for houses.  Following graph presents such an effective maximum price control.  Because of the maximum price control, the quantity demand increase from Q to Q1 and quantity supplied decrease from Q to Q2.  As a result of this, there is an excess demand of Q1 – Q2 is created with in the market.  Similarly, producers tend to sell the supply Q2 at price P2 which is called black market price.  Effects of maximum price can be further presented as below.  Creation of shortage of goods, due to the excess demand.  Attempt to sell goods at an illegal black market price,  Because of the black market price, selling of goods at a price more than the previous price.  Due to the maximum price as consumer surplus and producer surplus are adversely affected it will also badly affects social welfare.  The effect of consumer and producer surplus and effect over welfare can be illustrated by a graph as follows. 139 (i) Consumer surplus before maximum price ceiling = A+ B + C (ii) Producer surplus before maximum price ceiling = D + E + F (iii)Economic surplus before maximum price ceiling = A + B + C + D + E + F (iv) Consumer surplus after price ceiling = A (lost of B + C) (v) Producer surplus after price ceiling =F (vi) Economic surplus after price ceiling =A+F (vii) Dead weight loss =C+E  The way of calculating the dead weight loss.  Two factors determine the inclusion of B + D to the consumer surplus 1. Money and time spent to purchase scare goods 2. Time spent at the queue.  If the consumer would not spend an additional cost due to above two reasons, area of B + D added to the consumer surplus.  According to above information, effect of maximum price over consumer can be analyzed in two ways. 1. B + C = lost of consumer surplus 2. B + D = Increasing of consumer surplus  By adjusting the effect over consumer with producer loss of producer surplus, dead weight loss can be obtained as below. Dead weight loss = B + D – (B + C + D + E) = - (C+ E) 140   Maximum price is meaningful only if consumer received expected benefit as it is.  There are several approaches that can be taken to make maximum price meaningful. 1. Import 2. Providing incentives for the producers 3. Rationing  Goods can be imported as a remedy to the shortage of the goods arise due to the excess demand created by the maximum price. By doing so the benefit of imposing a maximum price can be given to the consumer.  Similarly by taking actions to encourage the producers who discouraged by the maximum price and by preventing market distortions the expected benefit has to be rationed among consumers.  As the price mechanism being neutralized due to the maximum price policy scare, goods have to be rationed by using non price rationing techniques. Non price rationing techniques are as follows.  Use of ration cards  Queueing method  Rationing with bribes  Distribute connecting with other goods  Black market price Implementing minimum price control.  Based on the belief that the market price determined by the forces of demand and supply is unfair to producers the price which is legally implemented higher than the equilibrium price to give a better price for producers is known as minimum price.  Minimum price should be imposed higher than the equilibrium price as the aim of the minimum price is to give fairness for producers.  The minimum price which implement higher than the equilibrium price is called efficiency minimum price. Example : Implementing a minimum price for paddy implementing minimum wage rates. 141  Minimum price implementation can be illustrated with the following diagram.  According to above graph, because of the implementing minimum price P1, the market supply increases from Q to Q2 and quantity demanded decrease from Q – Q1.  As a result an excess supply created at the market.  Effects of minimum price policy can be further illustrated as follows. 1. Accumulation of excess production of the market. 2. Unemployment problems can occur 3. Goods can be supplied to consumers at a discounted rate by keeping minimum price as nominal price. Sellers try escape from the law. 4. Excess investment situation can be occurred. 5. Affect over social welfare due to the effects over consumer surplus and producer surplus.  Welfare effects of minimum price policy can be illustrated with the following diagram. 142 Before minimum price, Consumer surplus = A+ B + C Producer surplus = D + E Economic surplus = A + B + C + D + E After minimum price, Consumer price = A Producer surplus Producer Producer _ (if the producer = revenue Variable cost determine to supply Q1) = ( B + D + F) - F = B+D Economic surplus after minimum price = A + B +D Producer surplus Producer Producer _ (if the producer = revenue Variable cost determine to supply Q1) = B + D + F – (F + G + H + I) 143  Although producer decided to supply Q1 as consumer demand Q2 producer revenue of B+D+F will be less than his cost.  This explains that although the minimum price is implemented to give benefits to producers it will not provide expected benefit to them.  Therefore, to implement minimum price meaningfully soma actions have to be taken. Following are some of such actions 1. Storing of excess supply 2. By products 3. Promoting the current demand 4. Exports  In addition to the above activities, a special; activity which the government use to implement minimum price meaningfully is known as price supporting policy.  In price supporting policies it is certified that the minimum price will be received by the producer. Therefore the minimum price is considered as a certified price. With considering minimum price as a certified price there are two forms of price supporting policies which followed by the government to increase producers’ income while protecting them; 1. Price supporting government purchases 2. Deficiency payment system price supporting policy with the government purchasing refers to the purchase of excess supply by the government remain after which the amount purchased by consumers from the total amount of goods producers are willing to supply to the market at the minimum price decided by the government.  The effects of purchasing the excess supply by the government can be presented using a graph as below. 144  1. Consumer surplus before certified price = A + B + C Consumer surplus after certified price = A Loss of consumer surplus = A +B+ C - A 2. Producer surplus before certified price = B + C Producer surplus after certified price = Q + E Increase in producer surplus = B + C+ J Government expenditure to =C+E+G+H+K+J purchase excess supply at certified price Consumer outlay = B+D+F Producer revenue = B+C+J+D+E+F+G+H+K (Producer revenue = consumer outlay + Cost to the government ) (iii) Effect Increase in Decrease in Cost of = producer - + government over social Consumer surplus surplus =B+C+J-(B+C+E+G+H++K+J) = -(C+E+G+H+K)  Loss of welfare by an amount of C+E+G+H+K took place due to the purchasing of excess supply by the government  Deficiency payment system is the system in which government pay the difference between the minimum price imposed by the government and the 145  price that the consumers are willing to pay to purchase the total supply that the producers are willing to supply at that minimum price.  Deficiency payment system can be illustrated by a graph as below. (i) Consumer surplus before certified price = A + B Consumer surplus after certified price = A+B+C+F+G Increase in consumer surplus = A+B+C+F+G – A+B = C+F+G (ii) Producer surplus before certified price = C + D Producer surplus after certified price = C+D+B+J Increase in producer surplus=B+J The total market supply of producer P1 at certified price = Q1 Market price for Q1 or the price that consumer is willing to Pay for Q1 = P2 The cot of government for deficiency payment = B+J+C+F+G+K Change in Change in Cost of the Effect _ government over = consumer + producer welfare surplus surplus = C+F+G+B+J-(B+J+C+F+G+K) = -K 146  Deficiency payment is = -K Producer revenue by deficiency payment = B+J+K+C+F+G+D+E+H Consumer outlay =D+E+H (Government cost + consumer outlay = producer revenue)  Frequent fluctuations of the prices of the goods produced is considered as price instability. When prices are unstable it will also occurs instabilities in the incomes of producers  Fluctuations of the prices of agricultural goods can be commonly seen in the world today. Frequent fluctuations of prices of agricultural goods became a major problem due to income of farmers being unstable.  In such situations to stabilize income of cultivators government follows various price stabilization policies.  Impose of rations over producers, accumulation of stock and distribution, limiting of the lands cultivated , impose of tariffs over imports, rationing of imports, limit imports, limit import as desired are some of the price stabilization techniques followed.  Impose of rations over producers is an important price stabilization technique. Impose of a maximum limit by the government over the amount of goods produced within a particular period of time is called rationing of products,  By this, it is expected to maintain price at a high level by limiting the supply which reach the market. 147