Economic Strategy

Aims of government's intervention

* 1. To correct market failure (allocatively efficiency)

* 2. To achieve a more equitable (fair) distribution of income and wealfare.

* The method chosen will depend to a large extent on whether the reason for intervention is concerned with market failure or with the desire to achieve equity.

Methods of the governments intervention

1. Financial

* --- Indirect taxes

* --- Subsidies

* --- Transfers welfare benefit

2. State provision of public goods and merit goods

3. Regulations and standards

4. Price controls and price stabilisation

- high minimum prices

- low maximum prices

Minimum Prices

* A minimum price is a price floor set by the government where the price is not allowed to fall below this set level (although it is allowed to rise above it).

* The reasons for setting a price floor is to protect the earnings of producers, to create a surplus and to guarantee a certain level of earnings

ADVANTAGES OF THE MINIMUM WAGE

Fair for workers to be paid a minimum wage.

Helps low earners gain a higher standard of living

Extra disposable income should lead to extra spending in the economy

Helps increase the gap between wages for low earners and unemployment benefit

May help reduce unemployment

DISADVANTAGES OF THE MINIMUM WAGE

Increases the cost to businesses

Businesses may increase their prices (cost push inflation)

Businesses may be unable to afford to employ as many workers

Could cause unemployment

Other workers may now ask for a pay rise

Doesn't help the unemployed who don't receive a wage

Maximum price control (price ceiling)

* A maximum price is a price ceiling set by the government where the price is not allowed to rise above this set level (although it is allowed to fall below). The reason for setting a maximum price is so that the prices of necessities don't rise too much in times of shortage.

* Problems with maximum prices is black market.

Comparing the maximum and the minimum price control

An effective price ceiling An effective price floor

1. Creates a shortage 1. Creates a surplus

2. P and Q are both drop 2. P will rise but Q drops

3. TR drops 3. TR drops or rises depending on PED

4. Non-price rationing methods, such as first-come first-served. 4. Non-price rationing methods, such as giving out small gifts

AGRICULTURE AND AGRICULTURAL POLICY

* Types of government intervention in agriculture

- buffer stocks

- subsidies

- high fixed prices

- reducing supply

- structural policies

* Buffer stocks

- buffer stocks to stabilise prices

- buffer stocks to stabilise farm incomes

Buffer Stock

* Stock used in agriculture to stabilize the price of commodities. The government purchases excess production for storage and sells that storage stock in years of low production.

* In general the use of buffer stocks stabilizes commodity market