How Government Intervention Applies to Supply and Demand

How Government Intervention Applies to Supply and Demand

Introduction

Any trade in a country has to be in line with the regulations put up by the government and its agencies. Governments always get their revenues through taxation of the trades that occur in the country. Therefore, government intervention in trade issues is inevitable. The following are some of the ways in which government intervention in the market influences to the demand or supply of a good or service.

Price control

Governments always try to provide good investment environment in order to ensure that the producers, middlemen or consumers are not exploited. This is doing through the price control. The price control is done through putting up or down of ceiling prices or floor prices.

Price ceilings. Governments always try to ensure that poor consumers are not exploited by knowledgeable traders. Therefore the government puts ceiling price to certain goods. Some traders who are exceeding that prices are prosecuted by law. When this happens, the traders continue supplying the goods within the prices that the government dictates. A good example is the sale of petroleum products where some countries form regulatory bodies that ensure that the consumer is not exploited. When this happens, the demand and supply for the commodity may shift to any side depending on the instantaneous price. If the ceiling price is placed above the prevailing market price, there is no effect on the demand or supply of the product. On the other hand, when the ceiling prices are set below the prevailing equilibrium, there arises a persistent shortage in the market since people are willing to pay more than the government demands to them. Demand would, in this case, overcome supply.

Price floors. The government can provide a minimum price for a certain commodity in order to protect the producers. If the floor price set is below the equilibrium, a persistent surplus in the market will be experienced since the supply will by far overcomes the demand (Baumol & Blinder, 2009).

Provision of a products to the public for free.

In some incidences, the government may decides to provide a certain commodity or service to the public for free. In most cases, such commodities include essential services such as education and medical services. In some countries, also, the government offers a transport. When the government takes up the provision of given product to its population, the demand for this product rises. This is because anyone can afford and there is no restriction on class or economic ability. The market supply reduces when many investors reduce their trade, and the supply reduces as well. Most investors would leave the trade.

Taxation

Taxes increase the ultimate price of a product. Therefore, taxation leads to a shift in the price equilibrium that exceeds a scenario where there no taxes are imposed. The buyers suffer from higher taxes when there is an inelastic demand curve and an elastic supply curve, while sellers would suffer if the supply curve is inelastic and the demand curve is inelastic (Rittenberg & Tregarthen , 2008).

A subsidy on the commodity can shift from curve to the right. This depends on who gets the subsidy. When the buyer receives the subsidy,the demand curve shifts towards the right thus an increase in quantity demanded at the equilibrium point. When the seller, on the other hand, receives the subsidy, supply increases at the equilibrium leading to a decrease in price.

When a government imposes a quota, the quantity of produced goods is limited. A quota that is higher than the prevailing production units leads to no effect on the demand and supply curve. When the quantity is lower, the consumers would be willing to pay more, thus increasing the equilibrium price (Mankiw, 1998).