Economics 9708/21 — October/November 2022
Cambridge AS Level · AS Level Data Response and Essays · worked solutions for every part, with the mark scheme
Topics Market Equilibrium and the Price Mechanism · Reasons for Government Intervention in Markets · Methods of Government Intervention in Markets · Price Stability · Elasticities of Demand · Production Possibility Curves · +5 more
Governments and markets
Prices, according to economists, are determined by supply and demand. In many times and places, however, prices have been set by governments. For example, in January 2020, the government of Argentina updated its list of maximum prices, setting guidelines for over 300 products. Consumers, via a smartphone app, can report any prices of these products that are above the maximum.
The World Bank has collected data on the extent to which the governments of developing economies have intervened in markets to set prices. Table 1.1 shows the results of this research.
Table 1.1: Government intervention in product markets to influence prices in developing economies
| Product market | Percentage of governments intervening in the market to influence price | Examples |
|---|---|---|
| Energy | 89 | Petrol in Iran |
| Food | 76 | Bread in Benin |
| Rice in Haiti | ||
| Building materials | 13 | Cement in Burkina Faso |
Source: Adapted from ‘In a fix’, The Economist, 11 January 2020
Governments generally impose price controls for one of three reasons:
- to redistribute income in an economy: maximum prices help the poor afford the necessities of life, whereas minimum prices support the livelihoods of farmers
- to stabilise a market: governments use stocks to smooth fluctuations in the price of a commodity like cocoa, buying when there is excess supply in the market and selling when there is excess demand
- to control inflation: maximum prices have been used in many countries
Many economists have been critical of the use of price controls by governments. In a market without government intervention, a product’s price acts as a signal of its scarcity and an incentive to overcome scarcity. However, minimum prices can lead to food rotting in warehouses while maximum prices can lead to hoarding and black markets.
Another reason not to impose price controls in an economy is that they can be very unpopular. For example, in Santiago, the capital city of Chile, an increase in the minimum price on the public transport system led to widespread unrest in 2019. In the same year, the government of Iran decided to raise the minimum price of fuel sharply and suddenly, leading to a great deal of protest.
A representative of the World Bank has stated that one reason not to impose price controls in an economy is that they can be hard to remove, expressing the view that ‘it is better not to have them in the first place.’
Source: Adapted from ‘In a fix’, The Economist, 11 January 2020
Explain how ‘a product’s price acts as a signal of its scarcity’.
Explain one possible reason why the Government of Iran may have decided to raise the minimum price of fuel in 2019.
Explain, with the help of a diagram, how an effective minimum price would affect the market for a basic food, such as rice in Haiti.
‘Governments use stocks to smooth fluctuations in the price of a commodity like cocoa.’
Consider whether government action to smooth fluctuations helps the workings of the price mechanism.
Discuss whether maximum price controls will always be effective in controlling inflation.
The rest of this paper
3 more questions- Q2Elasticities of Demand20M
- Q3Production Possibility Curves · Supply-Side Policy · Factors of Production20M
- Q4Exchange Rates · Protectionism · Balance of Payments20M