Question

analyze the role of government when determining prices in markets. What powers can they exercise on consumers?

Answer 1

Role of Government when determining prices in market

Government is one of the major contributors when it comes to determining the prices in market. When necessary government takes its stand and decides on the prices in the market so that neither the consumers nor the producers are at loss. In certain situations the government has to set prices for particular goods and services. Usually prices are automatically set by the market focres of demand and supply but for various reasons government will come into scene and try to stabalise things by price fixations. The various ways in which it is done is :-

1. Minimum Prices
This is the situation wherein the government will not allow the prices to go down below a certain level. If the prices are set above the equilibirum then it will cause an increase in price and vice versa. The only problem that arises out of this is minimum prices creates surplus and this surplus has to be bought by the government only so that it does not again float in the market and prices are disturbed.

2.Maximum Prices
This is the situation wherein the government will not allow the prices to go beyond a certain level. If the prices are below equilibirum then prices will fall. Also if the price is below equilibrium point then demand will be greater than supply which leads to shortage.

3.Buffer stock
The combination of the minimum and maximum prices is the buffer stock. In this method the government seeks to keep the price within a certain band. Here, the aim is to stabalise the prices and incomes for farmers and prevent shortages and high prices.

4. Limiting price increases
When there is a free market economy there are chances of natural monopolies, so there cannot be a effective competition. So there can be the problem of excessive price rise if government intervention is not there. Thus, government comes into picture for the price control.

5. Direct Price setting
Here the government sets the most efficient prices. Market forces are ignored and the government decides as to what to produce, how to produce and what prices to be charged. This normally happens in the communist economy.

The government if not fully but can excercise some of their powers on the consumers.

The Consumers has to pay the prices decided by the government.
What to produce, when to produce and how much to produce is decided by the government so consumers has to abide by the rules.
Even if the income is less and the price decided is more then too they have to pay the amount and this decreases their savings part.
Also if the minimum price is less than the equilibium price then they can save and it benefits the consumers.