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Abstract This article examines the government intervention in market governance, that is, why a local government that claims to be a rule maker or market regulator would intervene deeply in transaction disputes between market players. Introduction The phenomenon and the research question This article focuses on the phenomenon of government intervention in the process of market governance. The social construction of the market system The relationship between government and the market is the core issue of economic sociology, especially the sociology of markets Gao ; Fligstein An explanatory framework of risk transformation Based on the new institutionalist analyses in the fields of contemporary sociology and economics Williamson , ; Nee ; Scott , this article examines the local government intervention in market transactions in a broader institutional environment.
Risk transformation A risk-based perspective is an important lens for observing modern society Taylor-Gooby and Zinn , Footnote 1 and it is particularly helpful to understand the process of market governance by Chinese local governments. The structural sources of risk transformation How then does risk transform? The completeness of law The law is the institutional support of modern market economies, Footnote 6 as it provides basic rules for market transactions Qian, Table 1 The relationship between government and market players governance structure Full size table.
Table 2 The structural source of risk transformation Full size table. Formal contract and risk warning In September , Guo Xinsheng, a Wenzhou public institution employee, Footnote 15 came to the service center to offer a loan. Footnote 16 On September 29, , however, the borrower, Peng, was not in Wenzhou. Loan disputes and risk transformation According to the agreement, the borrower needed to pay interest on the 28th of every month.
Petition Letter, Faced with the hindrances of the legal channel, Guo formally started a petition. Why did the government intervene in the loan dispute? The structural sources of risk transformation As previously described, risk transformation is affected by structural factors as well as transaction characteristics and individual attributes. Low completeness of the law Studies have shown that the low completeness of the law is particularly evident in transition economies Murrell ; Djankov and Murrell The dead weight loss, represented in yellow, is the minimum dead weight loss in such a scenario.
If individuals who value the good most are not capable of purchasing it, there is a potential for a higher amount of dead weight loss. A price ceiling will also lead to a more inefficient market and a decreased total economic surplus. Economic surplus, or total welfare, is the sum of consumer and producer surplus. Consumer surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest that they are willing pay.
Producer surplus is the amount that producers benefit by selling at a market price that is higher than the least they would be willing to sell for. An effective price ceiling will lower the price of a good, which means that the the producer surplus will decrease. While the effective price ceiling will also decrease the price for consumers, any benefit gained from that will be minimized by decreased sales caused by decreased available supply for sale from producers due to the decrease in price.
This translates into a net decrease total economic surplus, otherwise known as deadweight loss. This loss is signified in the attached chart as the yellow triangle.
If a ceiling is to be imposed for a long period of time, a government may need to ration the good to ensure availability for the greatest number of consumers. One way the government may ration the good is to issue ticket to consumers.
A government will only allow as much of good to be out in the marketplace as there are available tickets. To obtain the good, the consumer must present the ticket and the money to the vendor when making the purchase. This is generally considered a fair way to minimize the impact of a shortage caused by a ceiling, but is generally reserved for times of war or severe economic distress.
Prolonged shortages caused by price ceilings can create black markets for that good. A black market is an underground network of producers that will sell consumers as much of a controlled good as they want, but at a price higher than the price ceiling. Black markets are generally illegal. However these markets provide higher profits for producers and more of a good for a consumers, so many are willing to take the risk of fines or imprisonment. A binding price floor is a price control that limits how low a price can be charged for a product or service.
A price floor is a price control that limits how low a price can be charged for a product or service. Generally floors are set by governments, although groups that manage exchanges can set price floors as well. The purpose of a price floor is to protect producers of a certain good or service.
By establishing a minimum price, a government seeks to promote the production of the good or service and ensure that the producers have sufficient resources to go about their work. For a price floor to be effective, it must be greater than the free-market equilibrium price.
If the price floor is lower than what the market would already charge, the regulation would serve no purpose. Since the price is set artificially high, there will be a surplus: there will be a higher quantity supplied and a lower quantity demanded than in a free market. As a result, a government will generally do significant research into the current market conditions for a good or service before setting a price floor.
Price Floor : If a price floor is set above the equilibrium price, consumers will demand less and producers will supply more. An example of a price floor is the federal minimum wage. In this case the suppliers are employees and employers are the consumers.
The federal government has established a price that all employers must pay their workers. Obviously employers can pay more than that amount, but they cannot pay less. The purpose of setting this floor is to ensure that all employees make enough money from their jobs to provide for their basic needs. History of the Federal Minimum Wage : History of the federal minimum wage in real and nominal dollars.
The federal minimum wage is one example of a price floor. A price floor will only impact the market if it is greater than the free-market equilibrium price. If the floor is greater than the economic price, the immediate result will be a supply surplus. As you can see from, a higher base price will lead to a higher quantity supplied. However, quantity demand will decrease because fewer people will be willing to pay the higher price.
This will lead to a surplus of supply. Surplus from a price floor : If a price floor is set above the free-market equilibrium price as shown where the supply and demand curves intersect , the result will be a surplus of the good in the market. A price floor will also lead to a more inefficient market and a decreased total economic surplus. An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease.
While the effective price floor will also increase the price for producers, any benefit gained from that will be minimized by decreased sales caused by decreased demand from consumers due to the increase in price. Since well designed price floors create surpluses, the big issue is what to do with the excess supply.
The first option is to let inventories grow and have the private producers bear the cost of storing it. The other option is for the government that set the price floor to purchase the excess supply and store it on its own. The government could then sell the surplus off at a loss in times of a food shortage. Deadweight loss is the decrease in economic efficiency that occurs when a good or service is not priced at its pareto optimal level.
Deadweight loss is the decrease in economic efficiency that occurs when a good or service is not priced and produced at its pareto optimal level. In a perfectly competitive market, products are priced at the pareto optimal point. Consumer surplus is the gain that consumers receive when they are able to purchase a product for less than the price they are willing to pay; producer surplus is the benefit producers receive when the sell a product for more than they are willing to sell for.
This all leads to diminished resources, stifled innovation, and minimized trade and its corresponding benefits. Government intervention through regulation can directly address these issues. Another example of intervention to promote social welfare involves public goods. Certain depletable goods, like public parks, aren't owned by an individual.
This means that no price is assigned to the use of that good and everyone can use it. As a result, it is very easy for these assets to be depleted. Governments intervene to ensure those resources are not depleted. Governments also intervene to minimize the damage caused by naturally occurring economic events.
Recessions and inflation are part of the natural business cycle but can have a devastating effect on citizens. In these cases, governments intervene through subsidies and manipulation of the money supply to minimize the harsh impact of economic forces on its constituents.
Governments may also intervene in markets to promote general economic fairness. But in the event of a market distortion leading to inefficient or inequitable outcomes, the cost of intervention may be justified.
Your arguments to support market intervention should rely on authoritative data, both qualitative and quantitative. Regulation may be justified where uncompetitive market structures or anti-competitive conduct lead to inefficient outcomes in the economy.
This may occur when there is a monopoly, or a small number of sellers can limit supply in the absence of substitutes or maintain prices higher than would occur in a competitive market. A range of regulatory interventions are available to government to restore a competitive market or manage a continuing monopoly situation.
Monopoly issues can be emotive with a variety of competing interests to balance. Ensure you carefully verify claims made by affected parties on both sides of the debate. Policy makers should be aware of existing regulations or mechanisms to deal with perceived or actual market failures, monopolies and abuse of market power.
The Competition and Consumer Act provides a range of powers that may well address the problem and make further regulation unnecessary or counterproductive. Policy makers should look to existing regulations and their actual or potential application before proposing new regulation. Markets may not allocate resources efficiently if one party in a transaction has significantly more information than another.
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