The concept of free market entails that market goes about with its everyday processes without economic intervention or regulation coming from the government. In theory, a market if left alone will naturally settle into equilibrium. Market equilibrium is achieved when supply is exactly equal to demand, which is characterized by the assurance that all producers are willing to sell their products and services at a certain price and all buyers are willing to avail what they want at the same price.
However, there are cases wherein the government will interfere with the free market equilibrium by means of price ceilings or price floors, taxes, and other means that will reshape the economy (Hooks 42). Price ceiling is a form of government intervention that poses an upper limit for the price of a certain good. Once the government has imposed a price ceiling, sellers or producers can no longer charge a certain product higher than the price ceiling that was imposed.
The objective of the government in imposing a price ceiling is to allow people to avail a certain product within their means. For an instance, if the government thinks that the free market price of rice is too high then the government will impose a price ceiling in order to prevent sellers from further increasing the price of rice (Mankiw 114). On the other hand, price floors is the exact opposite of price ceiling. Price floors is imposed by the government in order to place a minimum price for a certain good.
Commonly, price floor is above the market price, which is implemented by the government in order to protect the interests of sellers or producers. For example, price floors are usually imposed upon agricultural products wherein government need to established a minimum price in order to make sure that farmers have enough income to support their needs (Mankiw 115). Another way of government intervention is through taxes.
Taxes are usually imposed by the government in order to control the behavior of the sellers and buyers in terms of availing certain products. For example, most governments usually put high taxes on tobacco because they are discouraging the sale and use of such products (Mankiw 127). Works Cited Hooks, Jon A. Economics: Fundamentals for Financial Services Providers. Washington, D. C. : American Bankers Association, 2003. Mankiw, Gregory. Principles of Economics. Ohio: South-Western Cengage Learning.