Price Theory & Public Policy

3.0 Public Policy (cont'd)

3.1 Origins

3.2 Competition Policy

3.3 Equity

3.3 Equity

From time to time the State chooses not to accept the outcome of even a perfectly competitive marketplace.  Generally this reflects questions of equity - the 3rd 'e' of economics: efficiency, effectiveness and equity.  The outcome is judged 'unfair' to some group or sector of society.  In such cases Government can intervene in a number of ways.

The effects of such intervention is to alter the balance of producer and/or consumer surplus reallocating one or the other to the other party. (Producer Surplus -M&Y 10th Fig. 10.1; M&Y 11th Fig. 9.1; B&B not displayed; B&Z not displayed: Total Surplus M&Y 10th Fig. 10.2; M&Y 11th Fig. 9.2; B&B Fig. 10.1)

 One technique is a price ceiling (M&Y 10th Fig. 10.3;  M&Y 11th Fig. 9.3; B&B Fig. 10.10; B&Z not displayed).  The effects of a price ceiling depend, however, on the elasticity of demand.  If, for example, demand is inelastic the effect of the price ceiling may be to cost consumers - overall - more than they gain (M&Y 10th Fig. 10.4; M&Y 11th Fig. 9.4; not displayed B&B, B&Z).

Fig. 10.5 - Rent Control, p. 309

Fig. 10.6 - Price Floor

Fig. 10.7 - Price Support

Fig. 10.8 - Imports, p. 313

Fig. 10.9 - Tariff or Quota, p. 314

Fig. 10.10 - Excise Tax, p. 318

Fig. 10.12 - Excise Tax & Surplus, p. 321