Group MembersIsrat Jahan Nisha: 2014-1-88-003

Nafia Akther: 2014-1-88-008

Chapter 3Price Policy Instruments

Different price policy instruments can be integrated into the market model and the implications of such instruments have for the formulated political objectives.

Sometimes, Government intervenes on price formations, which results in a separate supply price and domestic price for same good.

Theory

Government intervene through subsidization or taxation of economic activities of production, consumption and trade to reach certain target prices on the domestic market.

Taxation of imports and subsidization of exports, will lead to a domestic price above the world market price, while subsidization of imports and taxation of exports achieve the opposite effect.

From a domestic price obtained through taxation and subsidization of trade, the supply price can deviate through taxation or subsidization of producers. Same principle applies for deviation of the demand price from domestic price.

‘r’ shows how many percentage points the domestic price is higher/lower than the world market price.

‘s’ shows the percentage by which the supply price deviate from the domestic price benefitting producers.

‘v’ shows the percentage by which the demand price deviate from the domestic price benefitting consumers.