The government and the market

India is one of the world's largest economies, and a market-based, regulated one: most prices depend on demand and supply. But markets do not always work fairly. A market gives things to those willing and able to pay. "If medicines became very expensive, could everyone still get them?" No. So, for fairness and equity, especially for vulnerable and low-income people, the government steps in.

1. Stopping unfair practices. The government can fix prices:

• a price ceiling is a maximum price. For example, on essential medicines, to stop overcharging.
• a price floor is a minimum price. For example, a minimum wage, so workers earn enough. A price floor only has an effect if it is set above the market price.

Think of a room: the ceiling is the top limit, the floor is the bottom limit.

Monopoly. When one seller (or a few) controls a product with no close substitute, it can charge more, supply less and offer poorer quality, because buyers have nowhere else to go. The government keeps its prices and supply in check.

Regulators keep markets open and honest:

The COVID-19 sanitiser story. Demand for sanitisers surged. Shops ran out and prices shot up. Some shopkeepers started hoarding (buying up stock far beyond need, to create a shortage and sell later at a high price) and black-marketing (illegal trade). The government declared sanitisers essential commodities under the Essential Commodities Act, 1955, and capped the price at ₹100 for a 200 ml bottle. Meanwhile, many companies started making sanitisers, and they were soon available at fair prices.

2. Providing public goods. Roads, bridges, parks, street lights, national defence, sanitation and drainage: everyone benefits, but they earn no direct profit, so private companies rarely provide them.

"Why can't the neighbours just build a park themselves?" Suppose each family pays ₹5,000 and the park gets built. But many families think: "If others pay, it will be built anyway, and I can use it free." So not enough money is collected, and the park is never built, even though everyone needs it. That is why the government provides or funds such goods.

3. But too much control has costs (p.208):

• Price distortions: if the government fixes wheat at ₹20 a kg when the market price is ₹30, the farmer says, "Why should I grow it? Where is my profit?" Production falls and shortages follow.
• Compliance burdens: a small restaurant may need many permits: food safety, fire safety, pollution control, local clearances. The time and cost can stop small entrepreneurs from starting or growing. It hurts ease of doing business.
• Less innovation: if they cannot earn a fair return, farmers will not invest in better seeds, irrigation or technology, and long-term output falls.

Watch out: the book's answer is balance. The government should step in where markets fail (unaffordable essentials, public goods, monopolies), but too much regulation can do harm. In a democracy, it should listen to consumers, producers and workers when deciding.