GOVERNMENT INTERVENTION
By Nicholas Jessop
Governments can intervene in the market of certain industries, usually to make certain that competition is fair and benefits the most people, as the free market system does guarantee that resource allocation is not biased. When governments interfere in the market there is an effect on the supply and demand of the industry and thus industry size which contributes to the employment in the industry. Governments also set various legislations or laws for various reasons in an industry.
There are certain common types of market intervention that governments usually execute:
-Governments can set an indirect tax on the producers of a product. Indirect taxes affect expenditure and raise the production cost for firms, shifting the supply curve to the left. When being taxed, depending on the elasticity of demand and supply, firms can try and pass on the tax through to the consumers in the form of a higher price. There two types of indirect tax:
Specific tax: is a fixed tax, regardless of the price the product is taxed the same. In Figure 5.1a, there is an example of specific tax. The supply curve S has been shifted to S+tax by the same amount($1)
Percentage Tax(ad valorem tax): is not a fixed tax and sets a percentage tax based upon the price of a product, shifting the supply curve differently depending on the price of the product. Figure 5.1b shows a specific tax where S1 is shifted to S1+tax. But where the price is higher(at the top of the supply curve) the product is taxed more heavily leading to the supply curve shifting angles.
There are certain common types of market intervention that governments usually execute:
-Governments can set an indirect tax on the producers of a product. Indirect taxes affect expenditure and raise the production cost for firms, shifting the supply curve to the left. When being taxed, depending on the elasticity of demand and supply, firms can try and pass on the tax through to the consumers in the form of a higher price. There two types of indirect tax:
Specific tax: is a fixed tax, regardless of the price the product is taxed the same. In Figure 5.1a, there is an example of specific tax. The supply curve S has been shifted to S+tax by the same amount($1)
Percentage Tax(ad valorem tax): is not a fixed tax and sets a percentage tax based upon the price of a product, shifting the supply curve differently depending on the price of the product. Figure 5.1b shows a specific tax where S1 is shifted to S1+tax. But where the price is higher(at the top of the supply curve) the product is taxed more heavily leading to the supply curve shifting angles.
-Governments give producers subsidies to lower the cost of production. Because subsidies are essentially payments to the producers, this has the effect of shifting the supply curve to the right.
-Governments can set either a minimum price or maximum price. This is done either to aid the producers of an industry, not allowing the forces of supply and demand to lower the price beyond a certain point or aiding consumers, not allowing producers to set a price higher than a certain point.
Maximum Price: Figure 5.7 shows a maximum (ceiling price). There has been a ceiling price set below the equilibrium price Pe at Pmax. However, because of the lowered price, there is an excess of demand that needs to be dealt with.
Minimum Price: Figure 5.9 shows a minimum (floor price). At Pmin a floor price has been imposed above the equilibrium price of Pe. This incurs an excess of supply however and a shortage of demand
Figure 5.9
- Governments intervene in the economy through product legislations, designed to protect consumers from a firms producing faulty or unsafe goods. In the case of H&M, an example could be a legislation put in by government that requires produced clothing to have stitching of a certain tensile strength.
- Governments set legislations on the treatments of employees, setting a minimum wage or outlining health and safety guidelines for workers in factories. For H&M this could mean that the cashier cannot be paid a weekly wage below a certain price.
-Governments have copyright laws that stop producers from stealing the intellectual property (ideas) of another firm. This is done to encourage innovation in industries.
How this affects H&M
H&M is part of a monopolistic market structure and thus does not have much sway over the market price. Being a Transnational Company that operates in many countries, H&M will have to interact with the governments of all the different countries it has stores. This could mean many things, from different minimum wages to different price ceilings. The market structure of H&M(monopolistic) can cause all of the above mentioned government interventions to affect H&M in specific ways.
Tax: firms in a monopolistic market structure face a relatively elastic demand curve. Also being a clothing store with many substitutes, this will make the demand curve even more elastic. If an indirect tax were to be set, then H&M would not be able to pass on much of this tax to the consumers through a higher price, because then consumers would choose to buy from H&M’s many competitors such as Zara. Figure 5.3 shows the effect of an indirect tax on a market with relatively elastic demand. S1 has raised to S1+tax. Because of the elastic demand, H&M can only raise the price to P1, passing on a small amount of the tax to consumers. The blue shaded area is the tax burden on H&M and the striped area is the relatively small tax burden on consumers. H&M will lose more than consumers if a tax were to be set.
- Governments intervene in the economy through product legislations, designed to protect consumers from a firms producing faulty or unsafe goods. In the case of H&M, an example could be a legislation put in by government that requires produced clothing to have stitching of a certain tensile strength.
- Governments set legislations on the treatments of employees, setting a minimum wage or outlining health and safety guidelines for workers in factories. For H&M this could mean that the cashier cannot be paid a weekly wage below a certain price.
-Governments have copyright laws that stop producers from stealing the intellectual property (ideas) of another firm. This is done to encourage innovation in industries.
How this affects H&M
H&M is part of a monopolistic market structure and thus does not have much sway over the market price. Being a Transnational Company that operates in many countries, H&M will have to interact with the governments of all the different countries it has stores. This could mean many things, from different minimum wages to different price ceilings. The market structure of H&M(monopolistic) can cause all of the above mentioned government interventions to affect H&M in specific ways.
Tax: firms in a monopolistic market structure face a relatively elastic demand curve. Also being a clothing store with many substitutes, this will make the demand curve even more elastic. If an indirect tax were to be set, then H&M would not be able to pass on much of this tax to the consumers through a higher price, because then consumers would choose to buy from H&M’s many competitors such as Zara. Figure 5.3 shows the effect of an indirect tax on a market with relatively elastic demand. S1 has raised to S1+tax. Because of the elastic demand, H&M can only raise the price to P1, passing on a small amount of the tax to consumers. The blue shaded area is the tax burden on H&M and the striped area is the relatively small tax burden on consumers. H&M will lose more than consumers if a tax were to be set.
Subsidies: Because H&M is not an essential commodity, such as wheat or milk, it is unlikely the government of the various countries H&M operates in would subsidies the industry much.
Product Legislations: Because H&M produces a product that is less likely to be unsafe to consumers, there is less legislations on the quality of H&M’s products than other firms. The government is may be likely to require H&M to state clearly if it is using a substance in its clothing that can commonly cause allergic reactions
Employee legislations: While H&M operates in many different countries, all these countries would have a minimum wage for workers that would have to comply with. Some countries could have lower minimum wages than others and this could be used to H&M’s benefit, for example setting up its factories in a country with a low minimum wage would be a smart choice.
Copyright Laws: H&M would have to deal with the licensed designs of certain designers when producing its clothing. If H&M would produce a design of shirt that is too similar to a piece by Zara, then there could be legal repercussions for H&M