Explain the effect of government intervention on equilibrium price (market determined price).

We have read that in a freely functioning market, equilibrium price of a commodity is determined by market forces of demand and supply without any interference by the government. But sometimes equilibrium price so determined is too high for the consumers or too low (i.e., unprofitable) for the producers of the commodity. In such a situation government intervenes directly and indirectly for changing the equilibrium price, i.e., it fixes the price either below the equilibrium price or above the equilibrium price as explained below.

Direct intervention. (Through control price and support price) — It refers to government policies by which prices are fixed directly by the government. This is done in two ways— through control price and support price. For example, to protect the interest of consumers, government fixed the maximum price of a commodity (like sugar) which is lower than the equilibrium price. This is called control price or price ceiling. Similarly, to protect the interest of producers like farmers, government fixes the minimum price of a commodity (like sugar cane) which is generally higher than the equilibrium price. This is called support price.

Indirect intervention. (Through taxes and subsidies) — When government influences market price indirectly by imposing taxes and giving subsidies, it is called indirect intervention. For example, in Delhi toned milk is sold by mother dairy @ र 29 per litre whereas it costs government र 31 per litre. It is a subsidised price because difference of र 2 per litre is paid by the government as subsidy.

Effects of government's intervention