Government intervention In Germany in 2009

There was considerable debate about the extent to which the government should be intervening in the
economy. For example, its citizens were worried about the future of Opel, a German car brand that was
part of the ailing General Motors. Some wanted the government to make sure jobs were saved no matter
what. Others, however, were more hesitant and worried about becoming the government becoming too
interventionist. Traditionally since the Second World War the German government has seen itself as a
referee in market issues and has avoided trying to control parts of the economy. It would regulate anti-
competitive behaviour, for example, but not try to run many industries. However in the recession of 2009
when the economy was shrinking the government was forced to spend more to stimulate demand and had
to intervene heavily to save the banking sector from collapse. The government also had to offer aid to
businesses to keep them alive.

Questions

1. What are the possible benefits of a government intervening in an economy?

2. What are the arguments against government intervention in an economy?

3. What prompted greater intervention by the German government in 2009?

4. What would determine whether the German continued to intervene on this scale in the future?

Additional case study: Government intervention

The price of raw sugar recently reached its highest level since 1981 due to problems with supply.
Historically, raw sugar has traded at between 10 and 12 US cents per pound at the New York Board of
Trade. But the price increased to over 18 cents last month.

Growing demand in Brazil for sugar to be turned into ethanol for fuel, coupled with a sharp fall in Indian
production have both been factors in the price increase. Sugar production in India for 2008-09 fell 45%
year-on-year due to less rain in the monsoon season damaging a number of a ricultural crops. The
London-based International Sugar Organisation predicts that global consumption of sugar is likely to
outstrip production by 9m tonnes next year, forcing food companies and governments to dig into
stockpiles. In the US, snack producers including Mars, Nestlé and Krispy Kreme Doughnuts put pressure
on the US government to relax import controls, warning that otherwise they might run out of sugar.
Commentators predict that most shoppers will be unaffected because sugar is such a small part of a
consumer’s typical spending in a week that no one will notice an increase in price.

1. Explain, using supply and demand analysis, why the price of sugar has been increasing recently.

2. Do you think the supply and the demand for sugar is price elastic or inelastic? Justify your choices and
explain whether this means any given change in supply or demand will have a bigger effect on the
equilibrium price of quantity.

3. In what ways is the market for sugar used in confectionery related to the market for ethanol?

4. How might companies such as Mars and Nestlé react to an increase in the price of sugar?