Government Intervention in the Market - Assignment Example

NAME: PROFESSOR: ECONOMICS DATE: 1. GORVENMENT INTERVENTION IN THE MARKET (a) Reasons for government intervention in the market When a market moves to equilibrium, the quantity demanded is equal to the quantity supplied. This equilibrium condition therefore does not sound well to both the buyers and sellers. In the real sense, buyers usually would like to be paying less if the market condition would allow them. They would therefore move forward to make a political case pushing for lower prices they should pay. A good example is about cars whereby the equilibrium between their supply and demand is beyond the reach of the common citizen, the government will be forced to impose limits to the car sellers (Adeyi et al 23). The other aspect in the market is the sellers. They usually target the highest profit hence charging high prices. They therefore air their grievances demanding for higher prices for their goods. The government is then compelled to set a maximum price that the sellers will earn their favorable profit. A good case is the one for labor markets whereby the equilibrium between the supply and demand for unskilled labor leads to low wage rate. These controls take the form of upper limit: price ceiling and lower limit: price floors (Adeyi et al 23). (b) Using the case of tomatoes business in a given market, the equilibrium price is usually set by the interaction of the quantity demanded in the market and the quantity supplied. Therefore applying the price ceiling by the government, that is the maximum price that should not be exceeded. This will lead to shortage of the tomatoes in the market, that is, lower supply and higher demand. On the other hand, setting a price floor, the minimum price by the government will have an effect on both the demand and supply. Price floor is effective when it is set above the equilibrium price. This will lead to surplus of tomatoes in the market; this is because the supply of tomatoes exceeds its demand. The advantages of price ceiling include, preventing suppliers from involving in overpricing the limited goods in the market. It is also beneficial in maintaining affordable cost of living even during times of inflation. The disadvantages include, discouraging suppliers to produce products because they are not able to set the prices that they anticipate in order to make profit. They also reduce availability of quality items (Adeyi et al 24). The disadvantages of price floors include, higher prices on the side of consumers and oversupply and inefficiency. 2. MARKET FAILURE The government has to get involved in producing certain goods to its citizens. According to this statement, public health is paramount in the lives of the citizens although it is scarce. The statement states that the public health is a public good. This means that the citizens of the country cannot be excluded from using it. It is paramount and non-excludable. An important factor of public goods is that the consumption by an individual does not reduce the consumption of the other individuals. Public health can also be referred to merit good. Merit goods are the services or goods that the state or the government encourages the consumers to use them. They therefore subsidize these goods in order to be available for the citizens (World Health Organization). However, the consumption of these goods leads to positive externalities. Positive externality is a benefit that is acquired or enjoyed by a third party due to a transaction, mostly economic, that had been carried out. According to the statement, public health is a merit good which generate the positive consumption externalities. The public health therefore provides extensive satisfaction to the citizens of the country of which they do not pay for the services. The existence of positive externality may lead to a net welfare loss. For example, about the market of education, free markets may provide quantity Q at a price of P. When the external benefit is ignored, the quantity may rise to Q1. Private good is any item that yields positive satisfaction to the individual but usually exercises complete private property right, hence preventing many from accessing. According to the statement, the government has to take up the complete role of providing public health because it may be difficult to give it to private individuals the role to provide it. This is because public health targets very many citizens and it does not require them to have property rights in order to use them (World Health Organization). Example of private good is a burger. A burger that has been consumed by certain person cannot be consumed by another individual. Let’s assume that there are only two people in the market that consume burgers. The table below will explain this; Price per burger The number of burgers Person 1 Person 2 Total $6 0 0 0 $5 0 1 1 $4 0 2 2 $3 1 3 4 $2 2 4 6 $1 3 5 8 (World Health Organization) 3. GDP According to this statement, I agree with Robert Kennedy who said that GDP measures everything except what makes life worthwhile.GDP or the Gross Domestic Product is concentrating on the quantitative growth of the economy of a country rather than the improvement of the living standards of the people. It is concentrated on how much the economy has grown, by how many digits and then compares with the GDP of other nations. It does not take into consideration what makes life worthwhile, for example the health of the citizens, the security and even the other social welfare (Boris et al). We should therefore measure the value and the quantity of goods and services produce. This is usually done in estimates hence in figures or digits form. We cannot measure the living standard of the people. We are not able to quantify the happiness of citizens.GDP is more of nominal. Real GDP goes ahead to reflect the value of commodities produced. Community values seem to have been surrendered in mere accumulation of materialistic things (Boris et al). Methods used in measuring GDP; 1. Expenditure Approach- This measures the total spending on all final goods and services. This approach include Gross investments (I) +Consumption goods and services(C) +Government Purchases (G) +Exports(X)-Imports (M) This can be summarized by the formula GDP=C+I+G+(X-M) 2. Income Approach(Y)-Calculated by adding up all the factor incomes to the factors of production National income+ Indirect Business Taxes+ Capital Consumption allowance and the resultant depreciation Net factor payments with the foreign countries. 3. Value added Approach This measures the value of all sold goods –This is the purchase of the intermediate goods that are used to produce goods which are to be sold. The disadvantage of these ways of measuring GDP is that it doesn’t measure income distribution, the quality of living, the standard of living, it also does not show any even inflationary price changes for example housing bubble. There are alternative methods of measuring GDP as tabled by Stieglitz commission. These alternative methods take into consideration the quality of life of the people and also the intangible valuables such as security. The recent changes in measuring GDP has contributed to what makes the well being of the citizens of a country rather than just the growth of the economy in figures. These methods also take into consideration sustainability; this means the government should take into consideration the degradation of environment due to constant use of natural resources in the purge of bettering life (Boris et al). 4. UNEMPLOYMENT The youth unemployment nowadays is both structural and cyclical unemployment. This is because structural unemployment is caused by great shifts in the economy at large. The structural unemployment among the youths is caused by lack of the necessary and requisite job skills. Most of the youths in a country such as Somalia are not enrolling to learning institutions where they could obtain job skills. This therefore renders them to this form of structural unemployment. As we can also see that there is rapid development of technology, this locks out those youths who have less knowledge and skills of operating the sophisticated machines (Lam). On the other hand the youth unemployment is also cyclical in the sense that the business cycles observed in the recent economies in most countries are rampant. Cyclical unemployment is therefore caused by recession. When there is fall in economic output, as measured using the Gross Domestic Product, there is a rise in cyclical unemployment which also affects the youth because they are the majority of those entering into the labor market (Lam). The lack of demand on the side of the employer is usually as a result of inadequate spending and the consumption of produced goods in the entire economy. This is a cause of unemployment among the youths because the probability of being employed is very low resulting from the poor economic state of the potential employers. Another cause of unemployment among the youths is the poor education system which is usually skewed to instilling theoretical knowledge to the students rather than instilling practical skills that can be applied in the market. These education systems also encourage the youths to seek white collar jobs instead of creating their own employment. This therefore escalates unemployment among the youths because of the large competition in the scarce jobs in the labor market taking into consideration the rising number of youths. This can be illustrated by having a look at the case of many African countries specifically the case of Somalia. Cultural factors also cause youth unemployment-For instance the deprived areas in most countries where there is negative perception and pessimism over jobs. Those youths who are brought up in broken families suffer a lot because they develop bad perception on getting jobs whatsoever. Those societies that are also prone to drug abuse among the youth have a high record of unemployment because the youths are simply unproductive. They lack that sound mind to be engaged in productive jobs (Lam). 5. INDUSTRIAL REVOLUTION (a) Industrial revolution is the transition process from ancient manufacturing processes to new ones. This therefore took place from the period between 1760 to around 1840.This process therefore included the improvement of the machines used in production of goods to the more sophisticated ones. This transition also took into consideration the use of wood to the advanced use of coal. The textile industries and iron industries played a major role in industrialization. Industrialization therefore not only increased the volume of goods produced but also resulted on increased employment rates, hence improving the people’s living standards in various countries where it took place. For example it started in Britain and then spread to West Countries (Douvere 765). Therefore, there was the first and second industrial revolution. (b) The principal causes of industrial revolution are the need to increase food production hence improvement of the machines involved directly in producing goods. This was because of the increasing population that was competing with the available scarce resources. The need for easier and faster transportation caused the industrial revolution whereby sophisticated transportation vessels were invented and constructed in order to take care of movement from one area to another easily. The average income of the citizens as a result of the industrial revolution therefore began to show an encouraging growth. All these factors teamed up in making industrial revolution a success. Up to date, the positive effects of Industrialization have been realized due to the fast growth of the economy. This is therefore the long run economic growth is achieved (Douvere 770). (c) The industrial revolution in Britain had many effects on the economic thought. The use of farming machines increased the number of people working in the farms hence giving them enough experience. There is the case of female workers who entered into a usually male dominated field. This changed the perception of work in the society thanks to the industrial revolution. The other effect on the economy is the rise in wage rate hence bettering the life of those who work in agricultural farms and also industries. On the other hand, this increase in production required a system of banking that would save the profits gained and also offer credit facilities to the firms. This made a great impact on the growth of economic thought for a period of time. The Revolution in Britain in that period between mid 18th century and mid 19th century contributed in many ways to the economic thought (Douvere 762). Works Cited Adeyi, Olusoji and Smith. Public policy and the challenge of chronic noncommunicable diseases. World Bank Publications, 2007. Print. Boris, Ahrend R. & Price, Robert. ECO/WKP (2008) 42 Unclassified. cournede2008eco, 2008. Print. Douvere, Fanny. The importance of marine spatial planning in advancing ecosystem-based sea use management. A Journal of Marine Policy, 32: 762-771, 2008. Internet resource. Lam, David A. The demography of youth in developing countries and its economic implications. Journal of World Bank Policy Research, Working Paper no. 4022, 2006. Internet resource. World Health Organization. Global tuberculosis control: epidemiology, strategy, financing: WHO report 2009. World Health Organization, 2009. Print. Read More