Government Intervention

Government Intervention. A topic of great contention as there can only be one winner and thus, an unfortunate loser. Why does the government feel the need to intervene in certain markets? One knows that government was created for the people and to look out for the populaces welfare. Knowing that, its easy to see and understand that government intervention aims in creating or establishing social equality for those who may be less fortunate than others. Its important to note that government has many options in which it can influence and intervene in markets. Of these choices, 3 of them are utilized most often: price floors, price ceilings, and taxes/subsidies. Price floors set out to establish a minimum price thats determined by the government in a specific market. Both price floors and price ceilings dictate who wins or loses by witnessing whether or not the price floor or price ceiling is above or below the equilibrium price set by supply and demand. As the name suggests, price floors and price ceilings are polar opposites of each other. Price ceilings aim in setting a max price that suppliers can charge for their products which too is determined by the government. Last but not least are taxes and subsidies. Taxes are imposed on goods in a market with the hopes that government revenue will be amassed at the expense of consumer and producer surplus. Subsides on the other hand help both the consumer and the producer but hurt the government. With the fundamentals established, we proceed into analyzing two different markets and thus two different types of government intervention that have taken place in our countrys history. By doing this, we will truly grasp the consequences these interventions created and how government intervention will inevitably produces losers despite good intention.

The first form of government intervention we will analyze is the effect of taxes and in particular, the whiskey tax that was imposed in 1791 by George Washington. At the time this tax was imposed, several whiskey suppliers were small farmers who converted their grain into whiskey to collect the little profit they could from their left over grain. Before the tax was levied, these small farmers and other suppliers were doing just fine thanks to a high demand of whiskey. Nonetheless, the tax on the small farmers essentially raised the cost of production for whiskey, which in turn decreased the supply of whiskey in the whiskey market. As seen in Figure 1, this decrease in supply consequently drove prices up while quantity of whisky supplied to the public conversely decreased. Using anecdotal evidence alongside other historical documents, I speculate that the elasticity of supply of whiskey in the 1790s was elastic. The reasoning behind that supposition derives from the fact that these small farmers were making very little profit from their whiskey and thus had little to no incentive to sell if required to pay a tax. Determining the elasticity of demand requires a little more thought and for one to probe the discontent of the suppliers to arrive at a conclusion. It wouldnt be too whimsical to suggest that the elasticity of demand was also elastic just like the elasticity of supply. But why? By delving and dissecting the anger displayed by the whiskey suppliers, one begins to see that a possible and perhaps the only reason why the suppliers were angry at the tax was due to the fact that passing some of that tax on to the consumer would have caused a steep drop in profit. If that were not the case why would the suppliers be mad if they knew consumers would still buy their products despite increasing prices; and if that conjecture is true, it implies that the elasticity of demand was elastic and hence, sensitive to any price change.

Since both parties were elastic, the tax imposed by the government hurt the suppliers so much that many dropped out of the business which consequently drove prices up that turned off consumers from buying what supply was left in the market. In short, both the consumers and suppliers lost in this representation of government intervention while the government left with a victory although minor, by collecting some government revenue from those who chose to still buy more expensive whiskey. Moving along to our second example we shall examine the effects of the price ceiling set on gas in the 1970s. Gas prices were reaching unprecedented heights and to bring relief to the consumer, the government placed a price ceiling on gas prices. As a consequence, the quantity demanded for gas at which the price ceiling was established was considerably larger than what suppliers were willing to provide. Due to increased demand, the market experienced a shortage that caused consumers to have to wait in long lines and at times miss out on filling their tanks thanks to the shortage caused by the price ceiling. The elasticity of demand for gas is quite inelastic since the majority of Americans have cars and need to drive everyday in order to complete day-to-day activities like attending work. The elasticity of supply on the other hand is elastic since a drop in price thats below the equilibrium price causes the quantity supplied of gas to drop immensely. As for who won and who lost, both parties left without trophies. Those who were first line everyday may have felt like winners but there was a majority of others who never even got the chance to drive around in cheap gas. Looking at Figure 2 one will see why the price ceiling created a shortage. Had the price ceiling been above the equilibrium price, there would have been no problems, but because the ceiling was placed below the equilibrium price, both parties experience hardship and loss.

d hardship.

Figure 1

Figure 2