Government Intervention In The Market Place Essay

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Government Intervention in the Market Place

The government may choose to set prices different to those set by the markets. Prices are not allowed to drop below a certain minimum. For example, in Agriculture, government may choose to subsidies farmers, set production quotas or offer price supports. Government may decide to set price ceilings or price floors. The government may also choose to increase or decrease taxes on certain commodities. In this essay, we will look at the effects of government intervention from an economic perspective. According to the Financial Mail (2006) In February this year, inflation rate in Zimbabwe reached the highest level in the world – an annual 782%. It is estimated that by the end of this month,
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Last year, the Zimbabwean government announced new price controls of basic food commodities in Zimbabwe to combat hyper-inflation. All companies producing and selling maize meal, which forms Zimbabweans staple diet, cooking oil, soft drinks, milk and sugar had to reverse recent price increases to their previous levels. The diagram below shows a price ceiling.

Setting the price ceiling at a price below the equilibrium market price will create excess demand i.e. a shortage equal to Q3 to Q2. Therefore, a price ceiling creates a shortage whereby the quantity demanded exceeds the quantity supplied. When shortages occur a black market may develop. According to Parkin et al. (2006:120) "a black market is an illegal market in which the price exceeds the legally imposed price ceiling". This occurs where those consumers that have acquired the good sell it at an illegal price above the price ceiling. If we look at the situation in Zimbabwe black markets have emerged for commodities such as fuel. According to an article on the Zimbabwean watch by Makoni (2005) "the government has urged businesses not to increase prices of goods and services by more than 10%; a clause that, if previous years are anything to go by, will fall on deaf ears. The state is set to gazette new prices for basic commodities but analysts feel this move

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