Question

Identify a particular good or service (Hand Sanitizer or other form of PPE) where its quantity traded is being influenced by a government policy. Is this product over-produced or under-produced? Who should be the winners and losers of welfare in this market? Does this seems to be true in the market for your product? Alternatively, identify a particular product being traded in a market you believe the government should intervene with a policy – whether it is a tax (or subsidy), or a price (or quantity) control. Since we know that this intervention will likely lead to market inefficiency, which group is likely to benefit from this intervention? What may be the greater reason to favor this group? Please use economic terms.

Answer 1

Identify a particular good or service (Hand Sanitizer or other form of PPE) where its quantity traded is being influenced by a government policy.

• Production and trade of hand sanitizers in most countries, are influenced by the health regulators of that country.
• For example, in the US, the FDA has strict rules regarding the same.

Is this product over-produced or under-produced?

• Due to strict regulations, they are under-produced. This has led to massive shortages recently, due to the Covid-19 pandemic.
• Most countries used to depend on imports from low cost exporters.

Who should be the winners and losers of welfare in this market?

• In such a market, the consumers should be the winners. This is a health related product, and it must benefit citizens across the country.
• There should be no losers, as such. However, if any burden has to be passed on, it should be to the producers. They have the financial power to bear such a burden.
• If producers are unable to bear the burden, the government must take it upon itself. This is necessary to stimulate the economy.

Does this seems to be true in the market for your product?

• No. As is the case with most health related products, producers pass on a major burden to the consumers, through higher prices.
• The government rarely intervenes on price issues.

Alternatively, identify a particular product being traded in a market you believe the government should intervene with a policy – whether it is a tax (or subsidy), or a price (or quantity) control.

• For the same product (Hand Sanitizers) or even other related products (PPEs), the government should intervene in a way that consumers don't end up taking the burden.
• First, the regulations on production and trade should be eased up slightly, especially during a crisis.
• Secondly, subsidies should be offered, so that the market price becomes affordable.
• Any local taxes, or import duties and quotas, may also be reduced, for the end benefit of the citizens.

Since we know that this intervention will likely lead to market inefficiency, which group is likely to benefit from this intervention? What may be the greater reason to favor this group?

• Any policy that disturbs the equilibrium, will create a deadweight loss.
• Total surplus of the market will reduce.
• However, if consumer surplus is rising, it is a policy worth pursuing.
• If producer surplus is not falling drastically, there won't be major inefficiencies.
• The burden of the deadweight loss, may be taken up by the government itself. This may be in the form of a higher subsidy payout, or lower tax revenues.
• The consumers are the main group to be benefited. This makes sense, because households are the providers of factors of production. If households are unable to do so, aggregate demand in the economy will collapse. No new consumption or investment activities will take place.