Market Intervention
Intervention
(or regulation) occurs when a non-market force causes the price and quantity of
a good bought and sold in a competitive market to be different from the
price/quantity combination that would occur if the market were allowed to
operate freely. Tickets to the World Series are sold for a price much lower
than would prevail if market forces were allowed to set prices. Minimum wage
laws force labor prices to be higher for certain jobs than they would be in a
free market.
Price Ceilings
When the
price of a good is fixed below the equilibrium level, a price ceiling is said
to exist in the market for the good. Price alone will be an inadequate
mechanism for allocating the available supply of the good among potential
buyers, and some other allocative mechanism such as first come-first served,
reliance on supplier’s preferences, or rationing, may be employed.
Black
markets (perhaps illegal) can exist in the presence of price ceilings. If one
individual is prepared to pay the set price but no more (i.e. would prefer any
amount of cash over the set price to the good), and another individual is
willing to pay more than the set price, the two can engage in mutually
beneficial trade.
Price Floors
When the
price of a good is fixed above the equilibrium level, a price floor is said to
exist in the market for the good. At the fixed price, there would be an excess
supply of the good and some method other than price would have to be found for
disposing of the excess. For example, the prices of many agricultural goods are
subject to price floors. The surplus exists because producers are prepared to
produce more at the fixed price than consumers are prepared to buy. The
regulating agency has to determine how to deal with this problem.
·
The
surplus can be produced and destroyed, which would be an obviously inefficient
use of society’s scarce resources but might be justifiable, say in the case
where prices below the floor would cause farmers to go bankrupt and this would
in turn cause socially unacceptable levels of food scarcity.
·
The
regulating agency could also stockpile the surplus and release it to the market
in the event of poor production (crop failure or whatever) in the future; this
would tend to even out price fluctuations over time.
·
Another
option is to sell the surplus abroad.
·
Yet
another option is to pay producers not to produce. This is no more wasteful of
resources than producing and destroying the surplus, and may be less wasteful
if there are costs associated with destroying the goods.
The minimum
wage is another example of a price floor. The effect of a minimum wage is to
create excess supply of labor. Those who keep their jobs are better off at the
expense of those who lose their job. Again the regulating agency is presented
with the problem of what to do with this excess supply.