The Affects of Government Intervention through Price Controls

Introduction1

Background2

Literature Review4

Price Ceilings5

Price Floors6

Critical Discussion8

Conclusion14

Recommendation15

References16

The Affects of Government Intervention through Price Controls

Introduction

Government plays a vital role in overall economy, there is a substantial affect made by government on firms and financial institutions. Government are bodies which are provider of various subsidies, numerous regulations, and along with that they also decide the methods which will be implemented in order to apply all those regulations. Decisions made by the government have such a huge impact on the cash flows of the firm. One of the most important things to be notified at this point is that motivation behind these government interventions are externalities which are imposed by the firms, financial institutes and rest of the economy. These externalities play prominent roles in probable crisis and also on wave of interventions and regulations which are followed by them (Evano? and Wall 2004; Herring, 2004).

Another important thing is the long-standing concern that the governments are accompanied with a limited amount of information regarding the economic conditions. At this point the lack of information is what ultimately prevents governments when it comes to intervene in most efficient manner. In a situation which is exactly as described above, this element of “lack of information” is the factor which prevent governments from a perfect assessment of the externalities which are generated by the particular firm or financial institution, and this is what leads them towards an in efficient decision of intervention. Consequently, researchers and at the same time policy makers call for a governmental reliance over market price of financial securities while making the decision of intervention. Without a doubt, basic view in the financial economics is that the market prices accompanied with a huge amount of information (Hart and Zingales, 2011).

This can be stated after having a look on the fact that market prices are able to provide valuable amount of guidance for the decision of government. There are numerous policy proposals which are in the end calling governments to make a good use of market prices; particularly they are in the monarchy of bank supervision. All such kinds of policy proposals are getting progressively prominent as an after effect of the recent crisis and there is also a perceived failure of the financial regulation which is stated at the same time (Hart and Zingales, 2011; Feldman and Schmidt, 2003).

This paper is going to deal with the aforementioned topic, in a very in depth manner. This was a thorough introduction of the topic. Now the discussion will be regarding the background of the topic, the background will let the reader understand that how important the topic is for the overall economy of United States. This will be explained with some real life and historical examples. Later on, their will a thorough research of already existing material on the topic and in the end the there will be conclusion and recommendation drawn. Those will be based on the research findings gathered through the literature ...