Introduction
Governments intervene in markets to regulate prices, ensure fairness, and stabilize the economy. Price determination through purely market forces can lead to inequalities or market failures. Therefore, various tools of government intervention are employed to correct such outcomes and ensure efficient and equitable allocation of resources.
Key Tools of Government Intervention in Price Determination
1. Price Ceiling
A price ceiling is the maximum legal price a seller can charge for a product. It is used to make essential goods affordable (e.g., rent control, food staples). However, if set below equilibrium, it can lead to shortages and black markets.
2. Price Floor
A price floor sets a minimum price above the equilibrium level, used to protect producers (e.g., minimum wage laws, support prices for agriculture). This can result in surpluses if demand falls short.
3. Taxes
Indirect taxes (e.g., excise, VAT) increase the cost of goods, shifting the supply curve leftward and raising prices. Taxes can discourage the consumption of harmful goods and raise government revenue.
4. Subsidies
Subsidies lower the cost of production or consumption, encouraging greater supply and reducing prices. Common in agriculture, energy, and health sectors.
5. Public Distribution System (PDS)
Governments may directly supply goods at lower prices through ration shops or subsidies to ensure basic needs are met, influencing market price by increasing overall supply.
6. Buffer Stock Operations
Governments maintain stockpiles of essential goods and release them during shortages to stabilize prices. Similarly, procurement in times of surplus supports prices.
7. Import and Export Controls
Governments may control imports or exports to regulate domestic supply and stabilize prices—banning exports during shortages or reducing import duties when local prices rise.
Conclusion
Through ceilings, floors, taxes, subsidies, and market interventions, governments play a crucial role in price determination. These tools aim to correct market imbalances, protect vulnerable groups, and ensure economic stability, though they can have side effects like inefficiencies or distortions if not carefully implemented.