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What Are the Different Types of Microeconomic Policy?

A. Garrett
A. Garrett

Tariff reform, industry reform, and deregulation are all forms of microeconomic policy. Microeconomics focuses on the production, investment, and purchasing decisions of individual consumers, businesses, and government entities. Consumers make purchases based on a product's utility, or its ability to increase satisfaction or happiness. Businesses and governments make production and pricing decisions based on the amount of competition they face.

In situations where there is a lack of competition, a business or government agency can set unreasonable prices, waste limited resources, and not have to worry about improving the products they produce. As a result, consumers become dissatisfied with the choices available to them and spend less money. This leads to a stagnant economy and market failure. Microeconomic policy seeks to avoid this by implementing strategies designed to improve productivity and efficiency.

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Businessman giving a thumbs-up

Tariffs are taxes imposed by governments on products imported into the country. This is done so that goods manufactured within the country are able to compete with similar foreign products that may have been produced at a lower cost. Taxed imports typically have a higher price than their domestic counterparts and are consequently unattractive purchases to consumers.

Businesses protected by tariffs may have little incentive to identify more cost-effective ways to produce or improve the quality of the goods they sell, however. As a result, limited resources may be misused and consumers have little free market choice. The microeconomic policy of reducing or eliminating tariffs introduces competition that gives consumers more choices and forces domestic producers to increase the quality of the goods they sell. Reducing tariffs also prompts these companies to find ways manufacture products in an efficient manner that lowers costs.

Industry reform is a microeconomic policy designed to encourage certain business sectors to produce goods that increase individual satisfaction, usually through government involvement. One way this is done is by the government lowering the transport costs of goods by building infrastructure like roads, railways, and airports. Privatizing certain products manufactured by the government yields market competition and increases efficiency. Finally, by providing direct financial assistance to businesses, capital investments can be made in technology or labor and boost productivity.

Deregulating certain industries is another microeconomic policy that seeks to lower consumer costs and ensure that businesses use resources efficiently. Government regulations restrict the amount of businesses active in a particular sector or industry. This may be done to limit the environmental impact a certain industry — like manufacturing — may have, or it may be due to a limited need for multiple producers, as with utility services. With few competitors, businesses in regulated industries have little incentive to set prices or provide products that maximize utility for the individual. Deregulation introduces more competition into a market and causes businesses to innovate in order to attract consumers and to find ways to efficiently provide the service so that costs are lowered.

Microeconomic policy is one way a government can stimulate its economy. When introduced, competition increases and ensures that only the most efficient and capable businesses are providing goods and services that individual consumers desire. As a result, the economy is infused with cash from consumers which businesses can then use to invest in more efficient means of production or create new products that increase consumer happiness.

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