Supply And Demand And Government Intervention In The Market
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Government Intervention in the Market
Government Intervention in the Market
The Control of Prices
THE CONTROL OF PRICES • Equilibrium price and the absence of shortages and surpluses • Minimum prices – justification – effects
Minimum price: price floor P
S
Pe
D O
Q
Minimum price: price floor P
S surplus
minimum price
Pe
D O
Qd
Qs
Q
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
Maximum price: price ceiling P
S
Pe
D O
Q
Maximum price: price ceiling P
S
Pe maximum price
shortage D
O
Qs
Qd
Q
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages – rationing
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages – rationing – black markets
Effect of price control on black-market prices P
S
Pe
D O
Q
Effect of price control on black-market prices P
S
Pe
Pg
D O
Q
Effect of price control on black-market prices P
S
Pe
Pg
D O
Qs
Qd
Q
Effect of price control on black-market prices P
S
Pb
Pe
Pg
D O
Qs
Qd
Q
Effect of price control on black-market prices P
S
Pb
Pe
Pg
D O
Qs
Qd
Q
Government Intervention in the Market
Indirect Taxes
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve
Effect of a tax on the supply curve P
S
O
Q
Effect of a tax on the supply curve P S + specific tax S
amount of specific tax
O
Q
Effect of a tax on the supply curve P
S + ad valorem tax
S
O
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
Effect of a tax on price and quantity P
S
P1
D O
Q1
Q
Effect of a tax on price and quantity P
S + tax
P1 + tax
S
P2 P1
D O
Q2
Q1
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
• Elasticity and the incidence of taxation
Incidence of tax: inelastic demand P
S + tax S
P1
D O
Q1
Q
Incidence of tax: inelastic demand P
S + tax
P2
S
P1
D O
Q 2 Q1
Q
Incidence of tax: inelastic demand P
S + tax
P2
S CONSUMERS’ SHARE
P1 P2 - t
PRODUCERS’ SHARE
D O
Q 2 Q1
Q
Incidence of tax: elastic demand P
S + tax
S
P1 D
O
Q1
Q
Incidence of tax: elastic demand P
S + tax
S
P2 P1
D
O
Q2
Q1
Q
Incidence of tax: elastic demand P
P2
S + tax
S CONSUMERS’ SHARE
P1 D
O
Q2
Q1
Q
Incidence of tax: elastic demand P
P2
S + tax
S CONSUMERS’ SHARE
P1 D
PRODUCERS’ SHARE
P2 - t
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P1 D
O
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1 D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
PRODUCERS’ SHARE
D
P2 - t
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
S P1
D
O
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
P1
D
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
CONSUMERS’ SHARE
P1
D
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
CONSUMERS’ SHARE
P1 P2 - t
PRODUCERS’ SHARE
D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
PRODUCERS’ SHARE
D
P2 - t
O
Q2
Q1
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
• Elasticity and the incidence of taxation • Implications for tax policy
Government Intervention in the Market
Government Rejection of Market Allocation
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages
The demand for and supply of hospital treatment P
P0
S
D Qs shortage
Qd
Q
The demand for and supply of hospital treatment P
S
Pe
P0
D Qs shortage
Qd
Q
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
The market for an illegal drug P
Slegal
Plegal
Dlegal O
Qlegal
Q
The market for an illegal drug P
Sillegal
Slegal
Plegal
Dlegal O
Qlegal
Q
The market for an illegal drug P
Sillegal
Slegal
Plegal
Dillegal O
Qlegal
Dlegal Q
The market for an illegal drug P
Sillegal
Slegal
Pillegal Plegal
Dillegal O
Qillegal
Qlegal
Dlegal Q
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation • effects on demand and supply
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation • effects on demand and supply • effects on price
Government Intervention in the Market
Agriculture and Agricultural Policy
AGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Inelastic demand for food P
Sa
1
P1
D O
Q
Inelastic demand for food P
Sa
1
Sa
2
P1
P2
D O
Q
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes – low income elasticity of demand
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes – low income elasticity of demand – increases in supply
Yields of selected crops (100 kg/hectare)
Source: Agriculture in the European Union, European Economy (European Commission)
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Decline in food prices over time P
S1
P1
D1 O
Q1
Q
Decline in food prices over time P
S1 S2
P1 P2
D1 O
Q1
Q2
D2
Q
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 prices P
Pg
D O
Qd
Q
Buffer stocks to stabilise prices P
Sa
1
Pg Bought into buffer stock
D O
Qd
Qs
Q 1
Buffer stocks to stabilise prices P
Sa
2
Pg Released from buffer stock
D O
Qs
2
Qd
Q
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 stocks to stabilise incomes P
P1
a
D O
Q
Buffer stocks to stabilise incomes P
Pεd = −1
P1
a Y
D O
Q
Buffer stocks to stabilise incomes P
P1
Sa
1
Sa
2
a Y
D O
Q1
Q2
Q
Buffer stocks to stabilise incomes P
P1
Sa
1
Sa
2
a Y
P2 D O
Q1
Q2
Q
Buffer stocks to stabilise incomes P
Sa
1
Sa
2
Bought into buffer stock
P1 P2′
a c
b Y
P2 D O
Q1 Q2′
Q2
Q
Buffer stocks to stabilise incomes P
Sa
3
Sa
1
a
P1
Y
D O
Q3
Q1
Q
Buffer stocks to stabilise incomes P
Sa
3
Sa
1
P3
a
P1
Y
D O
Q3
Q1
Q
Buffer stocks to stabilise incomes P
Sa
Sa
3
1
Released from buffer stock P3 P3′
e
d a
P1
Y
D O
Q3
Q3′
Q1
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Pe
D O
Qe
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S S + subsidy
Pe
D O
Qe
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S S + subsidy
Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Subsidy
S + subsidy Pg Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Subsidy
S + subsidy Pg Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs which are partly imported P
Pw
Sdomestic
Sworld
D O
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic
Pw
Sworld
D O
QS1
Imports
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pw
Sworld
D O
QS1
QS2
Imports
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pg Pw
Sworld
D O
QS1
QS2
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pg Pw
Sworld
D O
QS1
QS2
Qd
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer
Minimum price where some of the product is imported EU supply
P
Pw
EU demand
O
QS1
Imports
Qd1
Q
Minimum price where some of the product is imported EU supply
Import levy
P Pt Pw
EU demand
O
QS1
Qd1
Q
Minimum price where some of the product is imported Import levy
P Pt Pw
EU supply
AMOUNT PAID IN IMPORT LEVIES
EU demand
O
QS1 QS 2
Imports
Qd2 Qd 1
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
Minimum prices for a product where the EU is self-sufficient P
Pw
SEU a
b
DEU O
Qd1
Exports
QS1
Q
Minimum prices for a product where the EU is self-sufficient P
e Pi Pw
f
Intervention price
NET COST a b
SEU
d c
COST REVENUE FROM SALE OF SURPLUS ON WORLD MARKET
O
Qd2
Qd1
QS1 Surplus
DEU QS2
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply – quotas
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply – quotas – taking land out of use (e.g. set aside)
AGRICULTURE AND AGRICULTURAL POLICY
• Justification of the CAP – assured supplies of food – support for farm incomes – growth in agricultural productivity – stable agricultural prices – reasonable prices for consumers.
The cost of price and other market support for agriculture in the EU
Source: Agriculture in the European Union, European Economy (European Commission)
AGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP – agricultural surpluses • static costs
The cost to the taxpayer of high fixed prices P
S
Pe
D O
Q
The cost to the taxpayer of high fixed prices P
a
b
S
Pi
Pe
D O
Qd
Surplus
Qs
Q
The cost to the taxpayer of high fixed prices P
a
S
b
Pi
Pe
COST TO THE TAXPAYER D d
O
Qd
c Surplus
Qs
Q
The cost to the taxpayer of subsidies P
a
S
Pf
Subsidy
Pe
b
Pc
D O
Q1
Q2
Q
The cost to the taxpayer of subsidies P
a
S
Pf
Pe
COST TO THE TAXPAYER
b
Pc
D O
Q1
Q2
Q
Unequal support given to different agricultural products in the EU: 2001
Source: Agriculture in the European Union, European Economy (European Commission)
Unequal support given to different agricultural products in the EU: 2001
Source: Agriculture in the European Union, European Economy (European Commission)
AGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP (cont.) – irrational relative prices – removes disciplines of markets – redistributive effects – effects on the environment – effects on the rest of the world • effects of import levies • effects of export subsidies
AGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP – price reductions – production quotas – set aside – diversification; low-intensity farming – income support – the MacSharry reforms • effects on surpluses
Effect of the MacSharry reforms on cereal surpluses P
S1 P1
b
a
FARMERS' ORIGINAL INCOME
d O
c Qd1
Qs1 Original surplus
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1
Reduction in intervention price
S1
a
b
d
c
P2
O
Qd1
Qs1
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1
S2
S1 b
a
P2
Effect of Set-aside
d O
c Qd1
Qs1
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1 P2
S2
S1 b
a b′
a′
FARMERS' REDUCED INCOME d O
c′ Qd1 Qd2 Qs 2 Reduced surplus
c Qs1
D Q
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals • subsequent events
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals • subsequent events
– The 2002 reform proposals
Government Intervention in the Market
The Control of Prices
THE CONTROL OF PRICES • Equilibrium price and the absence of shortages and surpluses • Minimum prices – justification – effects
Minimum price: price floor P
S
Pe
D O
Q
Minimum price: price floor P
S surplus
minimum price
Pe
D O
Qd
Qs
Q
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
Maximum price: price ceiling P
S
Pe
D O
Q
Maximum price: price ceiling P
S
Pe maximum price
shortage D
O
Qs
Qd
Q
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages – rationing
THE CONTROL OF PRICES • Minimum prices – justification – effects – dealing with resulting surpluses
• Maximum prices – justification – effects – dealing with resulting shortages – rationing – black markets
Effect of price control on black-market prices P
S
Pe
D O
Q
Effect of price control on black-market prices P
S
Pe
Pg
D O
Q
Effect of price control on black-market prices P
S
Pe
Pg
D O
Qs
Qd
Q
Effect of price control on black-market prices P
S
Pb
Pe
Pg
D O
Qs
Qd
Q
Effect of price control on black-market prices P
S
Pb
Pe
Pg
D O
Qs
Qd
Q
Government Intervention in the Market
Indirect Taxes
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve
Effect of a tax on the supply curve P
S
O
Q
Effect of a tax on the supply curve P S + specific tax S
amount of specific tax
O
Q
Effect of a tax on the supply curve P
S + ad valorem tax
S
O
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
Effect of a tax on price and quantity P
S
P1
D O
Q1
Q
Effect of a tax on price and quantity P
S + tax
P1 + tax
S
P2 P1
D O
Q2
Q1
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
• Elasticity and the incidence of taxation
Incidence of tax: inelastic demand P
S + tax S
P1
D O
Q1
Q
Incidence of tax: inelastic demand P
S + tax
P2
S
P1
D O
Q 2 Q1
Q
Incidence of tax: inelastic demand P
S + tax
P2
S CONSUMERS’ SHARE
P1 P2 - t
PRODUCERS’ SHARE
D O
Q 2 Q1
Q
Incidence of tax: elastic demand P
S + tax
S
P1 D
O
Q1
Q
Incidence of tax: elastic demand P
S + tax
S
P2 P1
D
O
Q2
Q1
Q
Incidence of tax: elastic demand P
P2
S + tax
S CONSUMERS’ SHARE
P1 D
O
Q2
Q1
Q
Incidence of tax: elastic demand P
P2
S + tax
S CONSUMERS’ SHARE
P1 D
PRODUCERS’ SHARE
P2 - t
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P1 D
O
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1 D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
PRODUCERS’ SHARE
D
P2 - t
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
S P1
D
O
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
P1
D
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
CONSUMERS’ SHARE
P1
D
O
Q2
Q1
Q
Incidence of tax: elastic supply P
S + tax
P2
S
CONSUMERS’ SHARE
P1 P2 - t
PRODUCERS’ SHARE
D
O
Q2
Q1
Q
Incidence of tax: inelastic supply P
S + tax S
P2 P1
CONSUMERS’ SHARE
PRODUCERS’ SHARE
D
P2 - t
O
Q2
Q1
Q
INDIRECT TAXES • Specific and ad valorem taxes • Effects on supply curve • The incidence of taxation – the producers' share – the consumers' share
• Elasticity and the incidence of taxation • Implications for tax policy
Government Intervention in the Market
Government Rejection of Market Allocation
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages
The demand for and supply of hospital treatment P
P0
S
D Qs shortage
Qd
Q
The demand for and supply of hospital treatment P
S
Pe
P0
D Qs shortage
Qd
Q
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
The market for an illegal drug P
Slegal
Plegal
Dlegal O
Qlegal
Q
The market for an illegal drug P
Sillegal
Slegal
Plegal
Dlegal O
Qlegal
Q
The market for an illegal drug P
Sillegal
Slegal
Plegal
Dillegal O
Qlegal
Dlegal Q
The market for an illegal drug P
Sillegal
Slegal
Pillegal Plegal
Dillegal O
Qillegal
Qlegal
Dlegal Q
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation • effects on demand and supply
GOVERNMENT REJECTION OF MARKET ALLOCATION • Providing goods free to consumers – justification – effects – the case of health care • problems of shortages • methods of dealing with shortages
• Making products illegal – justification – the market for illegal products • comparison with legal prices
– comparison of prohibition and taxation • effects on demand and supply • effects on price
Government Intervention in the Market
Agriculture and Agricultural Policy
AGRICULTURE AND AGRICULTURAL POLICY
• Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Inelastic demand for food P
Sa
1
P1
D O
Q
Inelastic demand for food P
Sa
1
Sa
2
P1
P2
D O
Q
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes – low income elasticity of demand
AGRICULTURE AND AGRICULTURAL POLICY • Why governments intervene in agriculture – to reduce price fluctuations – to raise farm incomes – to protect rural communities – to encourage greater self-sufficiency in food
• Causes of short-term price fluctuations – fluctuations in the harvest – low price elasticity of demand
• Causes of declining farm incomes – low income elasticity of demand – increases in supply
Yields of selected crops (100 kg/hectare)
Source: Agriculture in the European Union, European Economy (European Commission)
Elasticities of demand for various foodstuffs (UK)
Source: National Food Survey 2000 (National Statistics, 2001), extracted from Tables 6.1, 6.3, 6.4 and 6.5
Decline in food prices over time P
S1
P1
D1 O
Q1
Q
Decline in food prices over time P
S1 S2
P1 P2
D1 O
Q1
Q2
D2
Q
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 prices P
Pg
D O
Qd
Q
Buffer stocks to stabilise prices P
Sa
1
Pg Bought into buffer stock
D O
Qd
Qs
Q 1
Buffer stocks to stabilise prices P
Sa
2
Pg Released from buffer stock
D O
Qs
2
Qd
Q
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 stocks to stabilise incomes P
P1
a
D O
Q
Buffer stocks to stabilise incomes P
Pεd = −1
P1
a Y
D O
Q
Buffer stocks to stabilise incomes P
P1
Sa
1
Sa
2
a Y
D O
Q1
Q2
Q
Buffer stocks to stabilise incomes P
P1
Sa
1
Sa
2
a Y
P2 D O
Q1
Q2
Q
Buffer stocks to stabilise incomes P
Sa
1
Sa
2
Bought into buffer stock
P1 P2′
a c
b Y
P2 D O
Q1 Q2′
Q2
Q
Buffer stocks to stabilise incomes P
Sa
3
Sa
1
a
P1
Y
D O
Q3
Q1
Q
Buffer stocks to stabilise incomes P
Sa
3
Sa
1
P3
a
P1
Y
D O
Q3
Q1
Q
Buffer stocks to stabilise incomes P
Sa
Sa
3
1
Released from buffer stock P3 P3′
e
d a
P1
Y
D O
Q3
Q3′
Q1
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Pe
D O
Qe
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S S + subsidy
Pe
D O
Qe
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S S + subsidy
Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Subsidy
S + subsidy Pg Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs in which the country is self-sufficient P
S
Subsidy
S + subsidy Pg Pe Pm
D O
Qe
Q1
Q
Effect of subsidies on foodstuffs which are partly imported P
Pw
Sdomestic
Sworld
D O
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic
Pw
Sworld
D O
QS1
Imports
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pw
Sworld
D O
QS1
QS2
Imports
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pg Pw
Sworld
D O
QS1
QS2
Qd
Q
Effect of subsidies on foodstuffs which are partly imported P
Sdomestic S + subsidy
Pg Pw
Sworld
D O
QS1
QS2
Qd
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer
Minimum price where some of the product is imported EU supply
P
Pw
EU demand
O
QS1
Imports
Qd1
Q
Minimum price where some of the product is imported EU supply
Import levy
P Pt Pw
EU demand
O
QS1
Qd1
Q
Minimum price where some of the product is imported Import levy
P Pt Pw
EU supply
AMOUNT PAID IN IMPORT LEVIES
EU demand
O
QS1 QS 2
Imports
Qd2 Qd 1
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
Minimum prices for a product where the EU is self-sufficient P
Pw
SEU a
b
DEU O
Qd1
Exports
QS1
Q
Minimum prices for a product where the EU is self-sufficient P
e Pi Pw
f
Intervention price
NET COST a b
SEU
d c
COST REVENUE FROM SALE OF SURPLUS ON WORLD MARKET
O
Qd2
Qd1
QS1 Surplus
DEU QS2
Q
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply – quotas
AGRICULTURE AND AGRICULTURAL POLICY • Subsidies – effects on price and output – the incidence of a subsidy
• High minimum prices – foodstuffs where the country is a net importer – foodstuffs where the country is self-sufficient
• Reductions in supply – quotas – taking land out of use (e.g. set aside)
AGRICULTURE AND AGRICULTURAL POLICY
• Justification of the CAP – assured supplies of food – support for farm incomes – growth in agricultural productivity – stable agricultural prices – reasonable prices for consumers.
The cost of price and other market support for agriculture in the EU
Source: Agriculture in the European Union, European Economy (European Commission)
AGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP – agricultural surpluses • static costs
The cost to the taxpayer of high fixed prices P
S
Pe
D O
Q
The cost to the taxpayer of high fixed prices P
a
b
S
Pi
Pe
D O
Qd
Surplus
Qs
Q
The cost to the taxpayer of high fixed prices P
a
S
b
Pi
Pe
COST TO THE TAXPAYER D d
O
Qd
c Surplus
Qs
Q
The cost to the taxpayer of subsidies P
a
S
Pf
Subsidy
Pe
b
Pc
D O
Q1
Q2
Q
The cost to the taxpayer of subsidies P
a
S
Pf
Pe
COST TO THE TAXPAYER
b
Pc
D O
Q1
Q2
Q
Unequal support given to different agricultural products in the EU: 2001
Source: Agriculture in the European Union, European Economy (European Commission)
Unequal support given to different agricultural products in the EU: 2001
Source: Agriculture in the European Union, European Economy (European Commission)
AGRICULTURE AND AGRICULTURAL POLICY
• Criticisms of the CAP (cont.) – irrational relative prices – removes disciplines of markets – redistributive effects – effects on the environment – effects on the rest of the world • effects of import levies • effects of export subsidies
AGRICULTURE AND AGRICULTURAL POLICY
• Reforming the CAP – price reductions – production quotas – set aside – diversification; low-intensity farming – income support – the MacSharry reforms • effects on surpluses
Effect of the MacSharry reforms on cereal surpluses P
S1 P1
b
a
FARMERS' ORIGINAL INCOME
d O
c Qd1
Qs1 Original surplus
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1
Reduction in intervention price
S1
a
b
d
c
P2
O
Qd1
Qs1
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1
S2
S1 b
a
P2
Effect of Set-aside
d O
c Qd1
Qs1
D Q
Effect of the MacSharry reforms on cereal surpluses P
P1 P2
S2
S1 b
a b′
a′
FARMERS' REDUCED INCOME d O
c′ Qd1 Qd2 Qs 2 Reduced surplus
c Qs1
D Q
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals • subsequent events
AGRICULTURE AND AGRICULTURAL POLICY • Reforming the CAP – – – – – –
price reductions production quotas set aside diversification; low-intensity farming income support the MacSharry reforms • effects on surpluses • continuing problems
– Agenda 2000 • the issue of EU enlargement • proposals • subsequent events
– The 2002 reform proposals
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