Government Intervention in the Market

Government intervention in the market is when the government adopts policies that will have an effect on the market, with the intension of achieving a particular outcome. These interventions can be to control the wages that people receive in a certain industry, which is called a minimum wage. Government can also control the type and the quantity of goods that are imported, with the intensions of protecting the local market or preventing undesirable goods from entering into the country, by imposing quotas which "is a physical limit" Borrington, Stimpson, Business Studies third edition (2006: 59), embargoes, or import tariffs to mention a few. Price ceilings and floors are one of the many examples of how the government intervenes. Despite the intension of the government, its intervention might not give the outcome the government was hoping to achieve. Sometimes the outcome can be positive, which is what the government will sought, other times it can have a negative effect, the situation in Ethiopia is a great example.

According to www.ezega.com (2011:1) the Ethiopian Government has "imposed price control, measures on 18 basic commodities..." The price control measures were introduces with the intention of helping people against the rising inflation rate."Inflation is the increase in average price level of goods and services over time." Borrington, Stimpson, Business Studies third edition (2006:52). The control measure on the prices of these commodities is referred to as a price ceiling.

"A price ceiling is a regulation that makes it illegal to charge a price higher than specified level." Parkin et al (2010:1240). In order for the implementation of a price ceiling to be effective it must be set below the equilibrium price which is the market price. A ceiling above the market price "does not constrain the market forces." Parkin et al. therefore, market forces will continue to trade at the equilibrium price. Setting the price below the market force makes the good cheaper for consumer. Which is what the Ethiopian government where aiming for, to protect them from the inflated prices. The decline in prices increases demand as seen in figure 1.1. The prices fell from P0 to P1 causing demand to increase from Q0 to Q1.

According to www.ezega.com the price ceiling imposed has created "paucity of sugar, cooking oil, and other basic items." This means there is a shortage. This can be seen in figure 1.1. The demand has increased from Q0 to Q1 while the supply has decreased from Q0 to Q2. The gap between the quantity demanded and the quantity supplied represents the shortage. The reason for the shortage is that there is no longer equilibrium between these demand and supply, for the set price (P1) suppliers are not willing to supply the quantity that is being demanded. This is the law of supply higher quantities are supplied at higher prices. This is why the Ethiopian shop owners have refused to stock and make available essential goods.

When there is an over production or an under production there is an inefficiency. The Ethiopian Government's intervention has created