Question

Question 2

(a) Should the government intervene in efficient competitive market equilibrium?

     Explain.

                                                                                                                                [4 marks]

(b) Comment on the outcomes of a price floor policy if the government were to impose

     such a policy.

                                                                                                                                [6 marks]

Answer 1

(a) No, If the market is efficient and competitive then there is no need for a government intervention. The aim of government is to make the market efficient, promote competition etc..

(b) Price floor or support price is minimum price of goods and services fixed by government to protect the interest of producers. When the government fix a price higher than the market equilibrium price then the demand of goods and services will decrease and the supply of the same will increase. Probably the government purchase the excess supply and stock them till price increase otherwise the price will decline.