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This article is contained in the business weekly report, a journal that is drafted weekly by the business sector in Kenya for the year 2008, in May. It portrays how the government intervened to both consumers and producers to protect them from exploitation by the market forces of demand and supply. Some of the concepts that I was able to identify in the article included: price floors, price ceilings, demand, supply and market inefficiencies that are caused by these practices.
Price Ceiling or Maximum Pricing
The government through the legislature amended an act of parliament that ensured that the land lords do not charge the tenants beyond a certain threshold. This was after the rental income was subjected to a much higher taxation rate. The landlords consequently reduced the supply of their houses. This meant that there was market inefficiency in terms of shortages. There was also a creation of sub standard houses thus leading to the existence of black markets due to the shortages experienced by a reduced supply in the rental houses. These shortages led to the existence of slums within the capital of Kena. The graph of this effect is shown in the first diagram.
Price Floor or Minimum Pricing
The same year the government considered offering incentives to the agricultural sector as it was in the process of recovering from post-Election violence. This was done to inform of subsidies that were to be offered to farmers. The National Cereals and Produce Board was to sell above a certain restricted price. This was to save the farmers from exploitation by the forces in the market. The government of Kenya considered that this move would help to boost the economy that was once at the verge of collapsing.
Through the Minimum wage bill the same government legislated the minimum wage rate that the employer was to offer employees. It was agreed in the public sector, the minimum wage to be offered was to be Sh 10,000. This was to protect the workers from labor exploitation.
Such economic concept has its implication in the form of excess supplies. For instance, at the end of the year, milk products were to be disposed offf at cheaper prices. The government of the time was forced to purchase the excess milk products and give them to the primary school children.
The graph of the above effect is shown in the second diagram below.
The Effect of Price Ceilings by the Government
From the graph below its clear that the externality shown is caused by the price ceilings set by the government.
The demand for rental houses remained high while the supply remained low leading to a shortage.
The government was forced to come up with stringent measures that ensured that the landlords did not come up with sub-standard houses.
The Effects of Price Floors by the Government
In the graph above the externality is caused by the maximum prices that are set by the government.
The supply of milk in the country was excess comparing to the demand for the same product. Consequently, the government was forced to buy from the farmers to prevent the wastage of milk products.