Economics Hl Assignment: Government Intervention

Economics HL Assignment- Government Intervention

Name: Jemin Patel

Teacher: Mr. Rajesh Kayriprath

Date: 13th January, 2016

Q- A government wants to provide income support for farmers, and is debating whether to provide subsidies or price floors for agricultural products with government purchases of the excess supplies. (a) Explain the effects of the two policies on the quantity of the good produced and on allocative efficiency. [10 marks]

Income Support is an income-related benefit by government for people who have low incomes. Income Support policy is specially designed for the producer with agricultural goods which mainly includes the farmer. The reason behind farmer’s low income is that most of the agricultural commodities have low

Hence, they show the sign of allocative inefficiency which can be resolved by government purchasing the excess supply. But this allocative inefficiency reflects in welfare loss for the society where MC>MB. In both the cases, the producers are benefited because they sell their product at a higher a higher price. Besides, the policies also call for employment to meet the subsequent new supply for the market. This shows that the workers are better off because of increased employment in the market. Also, an increase in producer surplus is observed in both the scenarios. On the contrary, the government budget is always hassled due to these policies. It is because, they need to have an opportunity cost of excess supply and reduce their expenditure to either maintain the price floor or pay the subsidy to the other stakeholders. Nevertheless, both these income support policies carry their own difference. A subsidy leads to a new equilibrium point Pc and Qsb, and therefore no excess demand or supply in the market. While, a price floor will result into a disequilibrium due to excess supply of the product which needs to be purchased by the government to maintain the minimum price of the product in the

The foreign producer has problem with competing with the export goods which have subsidized low prices in their market. There is also an increase in competition due to oversupply of the product as the producer are supply more to the market. As for the price floors, the exported surpluses lead to lower world prices due to extra produce available in the world market. This pressurizes the local farmers of the exported countries to cut down their prices and the production resulting into underallocation of resources to those