WEEK 5 – Government Intervention in Markets I

WEEK 5 – Government Intervention in Markets I

Subject: Business    / General Business
Question
TUTORIAL 4 (WEEK 5): Government Intervention in Markets I and II Understanding Your Theory:
1. The following questions relate to government intervention in markets.
a. What is a price floor?
b. In the case of a binding price floor what is the effect on the quantity demanded, the
quantity supplied, and the equilibrium price and quantity?
c. Does a binding price floor affect the efficient allocation of resources? Illustrate on a
diagram showing the effect on producer and consumer surplus and marginal cost and
marginal benefit.
d. What is the meaning of a “deadweight loss”? Illustrate on a diagram.

2. The following questions relate to government intervention in markets.
a) What is a price ceiling?
b) In the case of a binding price ceiling what is the effect on the quantity demanded, the
quantity supplied, and the equilibrium price and quantity?
c) Does a binding price ceiling affect the efficient allocation of resources? Illustrate on a
diagram showing the effect on producer and consumer surplus and marginal cost and
marginal benefit.
d) Illustrate the deadweight loss on a diagram.
Applying Your Theory:

3. The following is an article extract from “Alcohol Policy: On the Floor” in the Economist:
Britain is a little drier than it was a few years ago. Drinking has fallen since 2004,
breaking a five-decade upward trend. More people are teetotal, the number of underage
drinkers has shrunk and consumption by 16- to 24-year-olds is ebbing faster than in the
overall population.
But that still leaves a big group of heavy, troublesome drinkers. Bingeing—drinking at
least twice the recommended daily limit—is rising. Alcohol was a factor in half of all
violent offences in 2009-10, according to the British Crime Survey, and in more than 1m
hospital admissions, twice as many as in 2002-03. Chronic liver disease, which has been
falling in France, Italy and Spain, has risen in Britain since the 1970s…
Britain’s plans are radical. On March 14th the Scottish government voted to introduce a
minimum price per unit of alcohol; it will fix the level in April and hopes to enact it in
2013. On March 23rd David Cameron, the prime minister, proposed the same for
England and Wales.
What is being proposed as a solution to the binge drinking problem in Britain? Show this form
of price control on a diagram. What is the effect on total economic surplus from this price
control? Discuss the pros and cons of this particular policy.

4. The government is considering a floor price on cigarettes, in a bid to reduce consumption.
a. With the help of a diagram, outline the changes in consumer and producer surplus as a
result of this price floor. Is this market efficient?
b. Compare and contrast the effects of this price floor, versus if the government decided to
impose a tax instead (assume the new quantities would be the same under either scenario).

THE QUESTIONS BE DONE THOROUGHLY WITH THE NECESSARRY GRAPHS AND IMAGES IF POSSIBLE