Regulation of the mechanism of market pricing

The state of market equilibrium is determined not only by the influence of price factors. Non-price factors exert a serious influence on the mechanism of market pricing. The most significant factors include taxation and control over prices.

Graph 6.6 - Imposition of an additional tax and its influence on the tax load of the buyer and seller

value of consumer’s tax load value of produceer’s tax load

Tax

Taxation

Increase in tax influenced to all participants in market relations, that is, sellers and buyers of products. Suppose that the government introduced a tax of H monetary units per commodity unit.

Imposition of a tax for producer will lead to a reduction in the volume of production. On Graph 6.6 this is shown by shifting the supply curve to the left and up. At the same time, an increase in the equilibrium price and a decrease in the volume of production. Therefore, initial equilibrium point E₀ moves to a new equilibrium point E₁. As a result, the consumer buys the goods already at the price of P₁. Producer after payment of tax receives less income. Depending on the demand and supply elasticity happens distribution of answered tax load between consumers and producers of goods. The Graph shows the area of distribution of the tax load between consumers and producers of goods. In general, the consequences of taxation negatively affect both consumers and producers, since the increase tax initiates an increase in prices, and this leads to a reduction in demand and supply.

 

Control over prices

State regulation of prices in a market economy, as a rule, breaks the market balance of supply and demand (Graph 6.7). The administrative pricing below its equilibrium level is expressed in a decrease in volumes of production, because producers are not interested in increasing the supply at low prices.

Graph 6.7 - Control over prices by the state

As a result of an administrative price setting, a commodity deficit is formed in the market, which will negatively affect the level of consumption of society. The pressure on the market by the state will be expressed in a new market equilibrium point E₁, which is characterized by a reduced price of P₁ and a reduced volume of products of Q₁. Accordingly, the commodity deficit is equal to Q₀-Q₁.

As a result of such actions of the state, the mechanism of market self-regulation is turned off, the producers are clearly reacting to the price reduction, which, in fact, does not create stimulus to increase production volumes (there is a violation of the law of supply).

In this situation, the state should not restrict the price of the goods, but, conversely, create favorable conditions for the producer in order to increase the supply and, finally, to reduce prices in the market. All this, of course, is possible in conditions, if there is no artificial deterrence of the supply.

 

 

Elasticity of supply and demand

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