The market equilibrium price for coffee beans in Ecuador is $2.75/pound, a price
ID: 1178143 • Letter: T
Question
The market equilibrium price for coffee beans in Ecuador is $2.75/pound, a price at which growers are unable to make a profit. Due to the lack of profits, many growers have stopped production and the output of coffee beans has fallen from 400 tons per year (capacity for the region) to 250 tons per year. As a result of pleas from the growers, the governemnt steps in and sets a floor price for coffee beans at $3.50/pound.
What market respinse would you expect from this government action? How would supply, demand, and price change? Use a graph to illustrate your answer.
Explanation / Answer
The government may choose to intervene in the price mechanism largely on the grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. All governments of every political persuasion intervene in the economy to influence the allocation of scarce resources among competing uses
One important point to bear in mind is that the effects of different forms of government intervention in markets are never neutral %u2013 financial support given by the government to one set of producers rather than another will always create %u201Cwinners and losers%u201D. Taxing one product more than another will similarly have different effects on different groups of consumers.
Government intervention does not always work in the way in which it was intended or the way in which economic theory predicts it should. Part of the fascination of studying Economics is that the %u201Claw of unintended consequences%u201D often comes into play %u2013 events can affect a particular policy, and consumers and businesses rarely behave precisely in the way in which the government might want! We will consider this in more detail when we consider government failure.
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