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May 25, 2019, 10:53:26 am

Author Topic: Discuss an example of government intervention in markets that unintentionally le  (Read 101 times)  Share 

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DavidDenik

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Hi guys,
Im really struggling to form a coherent response to this question. The current response I have is :Discuss an example of government intervention in markets that unintentionally leads to a decrease in the efficiency of resource allocation (5 marks)- One example of government intervention that has unintentionally led to a decrease in the efficiency of resource allocation has been raising the price floor for minimum wage. Market failure is a situation where the price mechanism does not deliver the most desirable outcome for society. The market failure that the government was trying to rectify was the unemployment rate of Australians.. This market failure had arose due to the marginal benefit ( Payment from firms) being lower then the marginal cost which is offering their labour, and therefore the government addressed this by setting a new price floor for minimum wage, thus increasing the marginal benefit to the suppliers of labour. However, by raising the price floor of minimum wage, suppliers are now willing to offer more labour due to the higher prices and this is shown by an expansion along the supply curve, wheras consumers (Firms) have decreased their demand for labour due to the higher prices, and have therefore contracted their demand for the resource of labour. This results in a labour surplus, where supply is greater then the demand and thus results in an inefficient allocation of resources. This is due to the fact that the resource of ‘Labour’ isn’t being maximised in its use used due to the excess of supply, and thus takes reduces Dynamic efficiency as resources are being wasted and are unable to be put to different uses. Overall, the market for labour is thus made less efficient then it originally was as the excess of supply reduced dynamic efficiency as resources are unable to be moved, and is further supported by the higher rate of unemployment per capita. Allocative efficiency is also not being achieved due to the intervention by the government, which makes it impossible for the suppliers and consumers of labour to agree upon an equilibrium price through the operation of a free market, resulting in further opportunity costs for society.
Let me know what you guys think and put down some of your responses to this question if you're feeling nice :)

vox nihili

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Hi guys,
Im really struggling to form a coherent response to this question. The current response I have is :Discuss an example of government intervention in markets that unintentionally leads to a decrease in the efficiency of resource allocation (5 marks)- One example of government intervention that has unintentionally led to a decrease in the efficiency of resource allocation has been raising the price floor for minimum wage. Market failure is a situation where the price mechanism does not deliver the most desirable outcome for society. The market failure that the government was trying to rectify was the unemployment rate of Australians.. This market failure had arose due to the marginal benefit ( Payment from firms) being lower then the marginal cost which is offering their labour, and therefore the government addressed this by setting a new price floor for minimum wage, thus increasing the marginal benefit to the suppliers of labour. However, by raising the price floor of minimum wage, suppliers are now willing to offer more labour due to the higher prices and this is shown by an expansion along the supply curve, wheras consumers (Firms) have decreased their demand for labour due to the higher prices, and have therefore contracted their demand for the resource of labour. This results in a labour surplus, where supply is greater then the demand and thus results in an inefficient allocation of resources. This is due to the fact that the resource of ‘Labour’ isn’t being maximised in its use used due to the excess of supply, and thus takes reduces Dynamic efficiency as resources are being wasted and are unable to be put to different uses. Overall, the market for labour is thus made less efficient then it originally was as the excess of supply reduced dynamic efficiency as resources are unable to be moved, and is further supported by the higher rate of unemployment per capita. Allocative efficiency is also not being achieved due to the intervention by the government, which makes it impossible for the suppliers and consumers of labour to agree upon an equilibrium price through the operation of a free market, resulting in further opportunity costs for society.
Let me know what you guys think and put down some of your responses to this question if you're feeling nice :)

Hey, just wanted to compliment you for having a crack at the question before asking for answers! Unfortunately my knowledge of economics is not quite at a level where I'd feel comfortable giving you an answer to this question, but based on what I do know it looks pretty good :)
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Seamus Wong

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Hey David,

Your answer demonstrates that you understand how the governments intervention in setting a minimum wage results in an inefficient allocation of resources. However, in a SAC or exam, I would expect that this response would take too long to write, and since some statements were made more than once, assessors may find it hard to mark, and may not award you full marks (because they mark these questions globally - i.e. they don't read it all, they just look for key words).
I would also not link the mark failure to dynamic efficiency, since it is more related to allocative efficiency - the desirable situation whereby resources are allocated towards the production of goods and services that best satisfy the needs and wants and living standards of society.
 
With Economics, it's all about detailing the cause and effect relationships in a coherent manner so as to highlight that you know the content inside out.

Here's what I actually wrote for this same question on my SAC:

The governments intervention in setting a minimum wage has resulted in decreased levels of production, increased production costs, and increased costs to consumers, representing failed government intervention. Prior to the setting of the minimum wage, wages were negotiated on an individual employee employer basis, which was determined by the forces of supply and demand. However, under these unregulated conditions, workers were seen working long hours without adequate financial compensation, and often under poor conditions. This market failure was addressed through the setting of the minimum wage, which aimed to reduce income inequality, exploitation and ensure living standards were at reasonable levels. However, this intervention has resulted in a price for labour being far too high in some instances, above the point of equilibrium, causing an oversupply of labour. This has resulted in reduced levels of production due to firms simply reducing their employee numbers and cutting levels of production, and increasing unemployment as a result. This led to the needs and wants of society not being fully maximised, thus reducing allocative efficiency and illustrating an instance of failed government intervention.

I Did like how you mentioned the expansion and contraction in supply and demand, I should have integrated that into my response.

Hope this helps.