Chapter 7.4, Problem 6R

To determine

To evaluate:The time and the intervals when a government should intervene by setting price floors and ceilings.

Explanation of Solution

The government intervenes in the market in setting prices when it believes that such measures are required to protect the interest of suppliers or consumers. Special interest groups have often placed pressure on government leaders to protect those sectors.

The government often interferes in the market through price ceilings and price floor. A legal maximum price called a price ceiling that can be paid for a specific product or service. In comparison, the price floor is a minimum price set by the government that can be paid for commodities and services. This prevents rates from falling too much. If a price limit is set below the equilibrium price, the requested quantity can surpass the supplied quantity and result in excess demand.

It has been seen, through observation that a minimum price floor does not affect at all. The price floor in the labor wage industry considered being significant. The wage equilibrium rate is $ 3. The price level is estimated at $4, which is nice for employees who earn more than before. But the other side is that although there were 30 employees at equilibrium, there are now 20 employees after the price floor. So 10 employees were laid off. We see a deficit of twenty jobs at a $4 wage (40 employees are willing to work but only twenty jobs get work), thus creating a surplus of employment.

In order to raise their quality of living, governments often use wage incentives, such as the income tax credit earned in the United States, for citizens whose wages are deemed insufficient even for a bare living.

So from the above example can be said that the government often interferes and try to solve the challenges through effective strategies whenever is needed.

Economics Concept Introduction

Introduction:  The market-based economy is a supply and demand-based economic structure, with little to no government intervention. The features of the free markets are a spontaneous and decentralized system of transactions whereby individuals make economic choices.