Question

ree market and government intervention comparison in the same graph for any market and explain how government intervention for that problem correct the free market problems. this is when the government sets the price at $0.

What are some of the benefits of having governemnt intervention in organ market.

Answer 1

The graph on the left side shows a market situation with government intervention. While the right panel shows a free market situation.

In the fig 1, The equilibrium price is at Pe where the demand and supply curves intersect. But since it is a higher price and government wants to increase the consumption of that product. So the government introduces a price ceiling. The govt fixes a price at P. The problem here is that it leads to a shortage of commodities in the market.

In the fig 2, The equilibrium price is at P where the demand and supply curves intersect. Sometimes, a free market system leads to under production or over production of a product. So government intervention tries to settle that issue by regulating the prices in the market.

When price is set 0, market mechanism will not function. This is because a private good is rival and excludable. It uses price to exclude people from consumption. But a government is able to provide public goods without charging any price. But this leads to free rider problem as the government cannot cover the marginal costs of producing a product.