1.3 Government intervention

Student Starter Activity:

Suppose that the demand for and supply of milk in Australia are given in the table below:

a. Using graph paper, accurately plot the demand and supply schedules. 

a. What is the equilibrium price of milk? 

b. What is the equilibrium quantity of milk traded? 

c. Now suppose that a severe and prolonged drought triggers a decrease in the supply of milk by 8 megalitres a day at every price. If the market for milk isn’t regulated by the government:

Complete the new quantity supplied schedule in the table above, and using a different colour, plot the new supply line on your graph.

ii. What is the new equilibrium price? 

iii.What is the new equilibrium quantity? 

d. Suppose that the government imposes a maximum price (price ceiling) of $1.60 a litre to avoid hardship from the decrease in the supply of milk reported above. 

i. How much milk will be demanded by consumers? 

ii. How much milk will be offered for sale by suppliers? 

iii. How much milk will be actually sold? 

Iv. How much is the excess quantity of milk demanded? 

Extension Questions (HL students only)

Work out the change in welfare for producers, consumers and the Government. What is the net effect?

Now download and work through these documents:

and an excellent article courtesy of Tutor2u, on coffee price support schemes

and another one on rent controls

Student task: Identify a real world example of maximum or minimum price controls and evaluate the effects on various stakeholders. If you are struggling, look at the examples above for hints on analysis and evaluation

Taxes and Subsidies:

Key questions: Why do we tax and subsidise goods:

Taxes:

• Reduce consumption of harmful goods

• raise revenue

• Some indirect taxes are progressive.

Subsidies:

• To encourage consumption (healthcare and education)

• To reduce poverty and inequality (food and fuel)

• To increase producer revenue (farmers)

• To reduce Balance of Payment deficits

SL student notes:

SL Note template for Subsidies