Question

During the novel coronavirus (COVID-19) pandemic, people of all incomes from poor to rich are stocking up on different types of product they regard as necessary. Suppliers cannot increase their output quickly enough. Singapore government is concerned about profiteering and affordability in the markets concerned and is considering intervening. Using the demandsupply model, explain these phenomena in one or two markets of your choice. Advise which market interventions, if any, government should conduct in these markets.

Answer 1

Generally we can say that prices will go up mainly as supply is not enough. It is true that demand is also shifting left. However supply shift is greater than demand shift. Sellers are not able to produce. This creates shortage. Supply to left from S1 to S2 Raises prices from p1 to p2.

Government can use following strategies: Price ceiling- price ceiling is maximum legal price that can be charged by the sellers. When govt. believes that market prices are to high the it applies ceiling. Problems of ceiling:

Economic impact can be shown as below:When market had a equilibrium price P*, govt. thought it was too high and hence price ceiling at price Pc is put. Now at price Pc demand is D and supply is only S, hence there is shortage of goods.

Initial equilibrium is disturbed. Consumers will be better off in terms of price but will have to face shortage. Quality of goods may down and parallel markets may flourish.Producers are worse off and society as a whole is also worse off due to misallocation of resources.

Government also guides sellers through a catalogue of prices that can be charged for goods.

Government also relaxes taxes a bit so essential goods can be bought at lesser prices.

Subsidy can also be given to reduce prices.

In my opinion, reducing taxes is a better way as it will make goods cheaper without casuing market distortions.