Government Intervention In The Market. (Specifically The Australian Market.)

1263 words - 6 pages

The price mechanism plays an important role in resolving the economic problem of unlimited wants versus limited resources in a market economy. Left alone to function the market can create less than satisfactory outcomes with equilibrium prices or quantities being either too high or too low. The government has many powers it can exercise to intervene and move the market to a point that it considers more satisfactory to the economy. Some of the government’s powers include putting in place a ceiling or a floor price, increase taxes such as excise duty, restricting the number of suppliers in a market or provide incentives to encourage new suppliers to enter the market. All these controls ...view middle of the document...

A floor price in this market also creates more jobs as producers are able to cover the costs of hiring additional staff. For example the US government guarantees its wheat farmers a minimum price for their produce. The US government offers to buy any surplus that cannot be sold by the wheat farmers at the floor price.The government also uses price floors in the labour market. In an effort to cut costs, increase profit margins and shareholder returns businesses try to minimise pay rises for employees, especially labourers. In order to protect employees from exploitation the government introduced minimum wage laws. These laws specify the lowest wage an employer can pay its employees and therefore protects the rights of workers and guarantees them a minimum standard of living. The Retail Award provides minimum wage levels for sales assistants and other people working in the retail industry. The award provides minimum wages for eight categories of workers. For example the minimum wage for a level 8 retail employee is $740 per week and covers previous store managers and level 5 clerical officers. The award also covers annual leave and sick leave entitlements as well as other word related entitlements.To implement a floor price, the government must first decide on whether or not a floor price should be used, what the floor price should be, how they will deal with the side effects, over what period of time it is to be introduced and if the benefits outweigh the consequences. When used floor prices can cause significant side effects in the economy, because of this it is imperative for the government to carefully decide if there is another way to achieve their goals.The effects of floor prices on the market are extensive and are both positive and negative:Gives producers a guaranteed minimum return and standard of living.Prevents worker exploitation from business cost cutting and provides them with a guaranteed minimum income and standard of living.By artificially increasing the price of a good the government decreases demand as consumers decide to purchase less of that product, or are forced out of the market. This means that consumers are purchasing less than the market equilibrium.As producers are now guaranteed a higher price they are willing to supply more of a good than the market equilibrium.With consumers demanding less and producers producing more, a surplus is created. If the surplus is allowed to remain in the market there is a chance that the price will drop...

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