Price Controls and Government Intervention

1
Price Controls and Government Intervention
2
Intervention in the consumer markets

• The effect of a maximum price on the demand for
  food

3
A maximum or ceiling price on foodstuffs
P
SEU
Pe
Pmax
DEU
Q
Qe
O
4
A maximum or ceiling price on foodstuffs
P
SEU
Pe
Pmax
DEU
Qe
QS2
Qd1
Q
O
Shortage
5
A maximum or ceiling price on foodstuffs
P
SEU
P at Qd1
Pe
Pmax
DEU
Qe
QS2
Qd1
Q
O
Shortage
6
A maximum or ceiling price on foodstuffs
P
SEU
P
Potential Revenue from black /parallel market
Pe
Pmax
DEU
Qe
Qd1
Q
QS2
O
Shortage
7
Intervention in the labour markets

• The effect of the minimum wage on unemployment

8
The effect of a minimum wage on unemployment
P
S workers
Pe wage
D workers
Q
Qe
O
9
The effect of a minimum wage on unemployment
P
S workers
Pmin
Pe wage
D workers
Q
Qe
O
10
The effect of a minimum wage on unemployment
P
S workers
Pmin
Pe wage
D workers
Qe
Q
O
unemployment
11
Intervention in agricultural markets

• Cost to taxpayers
• of price support
• and subsidies

12
The EU system of high prices in foodstuffs
P
SEU
Pmin
Pe
DEU
Q
Qe
O
13
The EU system of high prices in foodstuffs where
the EU is self-sufficient
P
SEU
b
a
Pmin
Pe
DEU
QS2
Qd1
Q
Qe
O
O
Surplus
14
The EU system of high prices in foodstuffs where
the EU is self-sufficient
P
SEU
b
a
Pmin
Pe
COST OF BUYING THE SURPLUS
DEU
QS2
Qd2
Q
Qe
O
O
Surplus
15
Intervention in agricultural markets

• Cost to taxpayers
• of price support
• and subsidies

16
The cost to the taxpayer of high fixed prices
P
S
Pe
D
Q
O
17
The cost to the taxpayer of high fixed prices
P
S
Pmin
Pe
D
Q
O
18
The cost to the taxpayer of high fixed prices
P
S
b
a
Pmin
Pe
D
Qd
Qs
Q
O
Surplus
19
The cost to the taxpayer of high fixed prices
P
S
b
a
Pmin
Pe
COST TO THE TAXPAYER
D
d
c
Qd
Qs
Q
O
Surplus
20
The cost to the taxpayer of subsidies
P
S
Pe
D
Q1
Q
O
21
The cost to the taxpayer of subsidies
P
S
a
Pfloor
Subsidy
Pe
b
P2
D
Q2
Q1
Q
O
22
The cost to the taxpayer of subsidies
P
S
a
Pf
COST TO THE TAXPAYER
Pe
b
Pc
D
Q2
Q1
Q
O
23
High fixed prices
Subsidies
24
Q1. If a government were to fix a minimum wage
for adult workers, economists would predict
(Select one answer) (a)       wages in
general would fall as employers tried to hold
down costs (b)       less young workers would
be employed (c)       the costs and prices of
firms employing cheap labour would increase (d)
      there would be more unemployment
25
Q14. In the table below what would be the new
equilibrium price if the government gave firms a
subsidy of 2 per unit on this good?
(Select one answer) (a)       5 (b)      
4 (c)       3 (d)       2