Question

Why might a society prefer a government policy that lowers our standard measure of welfare? Give some examples.

Answer 1

Ans) Government intervention can be sometimes seen by economists as inefficient as it alters the market equilibrium and creates deadweightloss (as we measure it in standard economics studies). But these are preferred by the society because it prevents exploitation of certain groups.

For eg- price flooring prevents producers from wrath of unfairly low prices. For example when government feels that price for produce of farmers is too low, it makes some price as legal minimum which must be paid to them when buying product from them.

Another example is when government feels that gasoline prices are going too high, it sets some price lower than equilibrium price (price ceiling) to protect the buyers from over pricing.