nt any that it feels to be against the public interest (e.g. the production of drugs). In addition to government intervention in the market place further dislocation of the price mechanism can occur, for example European laws passed by the European Union as they strive for conformity amongst member nations. Price ControlsPrice control is a clear example where government intervention disrupts the price mechanism. Prices can be effected in a number of ways. A government subsidy will artificially reduce the price of a good and boost demand, an example being certain foodstuffs. Conversely, a government tax or tariff in a good in this way will increase its price to the consumer and decrease demand. This illustrates how government can use the efficiency of the price mechanism to change supply and demand. The reason for their interaction can be based on economic, social or political factors. For instance, tobacco products are taxed very heavily thus artificially raising the price of the product. This reduces demand for cigarettes despite their inelastic nature, thereby benefiting the general health of the population whilst raising substantial revenues for other social programmes. There are instances where manipulating the price mechanism can bring undesirable results. During the late 1980’s and early 1990’s subsidies were given to farmers in Europe to encourage production of certain foodstuffs where supply was dwindling due to low prices. A ‘price floor’ was established where a farmer earned a minimum sum for his goods. This encouraged additional production of particular foodstuffs as farmers acted as if in a free market economy. The outcome was that huge surpluses of food such as butter and beef accumulated, which had to be stored by the authorities. Eventually much was just discarded. Huge sums of taxpayers money had to be spent distorting the free market, resources had been wasted and the farmers had to ...
