Government Policy and Its Impact on

Microeconomics A Term Paper

Submitted to
Department of Development Studies
National College, Kathmandu University

In Partial Fulfillment of the Requirement for the BA

In
Development Studies

Submitted by
Hemanta Dulal
BDevS, 1st Semester
Roll no. - 2511
National College
Dhumbarahi, Kathmandu, Nepal

2023
ACKNOWLEDGEMENT
This term paper has been successfully completed with the help and guidance of our
respected lecturer Mr. Lokendra Kunwar, National College. So, I would like to thank
him as well as National college for the support.

ABSTRACT

Government policies and microeconomics are connected with each other in such a way
that a little change in a few government policies will affect individual economic units.
According to the Collins English Dictionary, a government policy is a set of ideas or
plans that is used as a basis for making decisions, especially in politics, economics, or
business. Microeconomics is a branch of economics that studies the behavior of
individuals and firms in the market. It focuses on the choices that individuals and firms
make, and how these choices interact to determine prices, quantities, and the allocation
of scarce resources. Government policy directly or indirectly creates microeconomic
effects when changes in tax policy, fiscal policy, regulations, monetary policy, tariffs,
etc. The study highlights how taxation affects microeconomics levels, role of price
regulation, monetary and financial policy, as well as the consumers protection policies
and acts.

Keywords : Government, microeconomics, market, policy, regulations, tariffs.

ABBREVIATIONS

govt : Government
NRB : Nepal Rastra Bank
auth : Authentic
obj : Objective
org : Organization
TABLE OF CONTENT

ACKNOWLEDGEMENT

ABSTRACT
 ABBREVIATIONS

TABLE OF CONTENT

INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objective of the study
1.4 Significance of the study
1.5 Limitation of the study
1.6 Organization of the study

LITERATURE REVIEW
2.1 Theoretical literature review
Government taxation affects microeconomics level
Price regulation
Monetary and financial policy, and their regulation
Consumer protection

METHODOLOGY
3.1 Research design
3.2 Conceptual framework
3.3 Sources of data
3.4 Tools and techniques

ANALYSIS AND INTERPRETATION 4.1

First objective
4.2 Second objective
4.3 Third objective

CONCLUSION

References
study
INTRODUCTION

1.1 Background of the

Government policy directly or indirectly creates microeconomic effects when
implemented. Changes in tax policy, fiscal policy, regulations, monetary policy, tariffs,
etc. affects individual as well as entire economy of a nation. Microeconomics studies
about the individuals’ demand, supply and allocation of resources (Bondarenko,
Oct-06, 2023). Generally, it applies to the market of goods and services that deals with
individual and economic issues (Anon. n.d.). Government policy affects each and every
individuals within the economy.

1.2 Statement of the Problem

Government policy is one of the key factor that affects microeconomics variables.
Government can’t guarantee that the policy they had implement will be 100 percent
effective for every individuals and households. But the problem of implementing low
effective policy is the major concern for the nation. Just like in the case of Sri Lanka,
that they have to face economic crisis recently due to improper government policy.
Unaware of considering the microeconomic variables while making policy by the
government. Taxation, price consideration, monetary policy, market transparency,
market competition, and consumer protection are some microeconomics levels that are
mentioned in this study.

1.3 Objectives of the study

The main objective of this research is to find out and elaborate the effect of government
policy on the microeconomics levels.
The specific research obj are as follow:
To analyze government taxation and price regulations.
To find out the effect of monetary and financial policy on microeconomic variables.
To examine the impact of consumers protection on microeconomic variables.
1.4 Significance of the study

The study shows the significance about how taxation, monetary policy, financial policy,
market competition and consumer choice, and consumers protection influences
microeconomic variables. Changes to tax policy, fiscal policy, regulations, interest rate
and subsidies affect individual choices.

1.5 Limitations of the study

The study has few limitations that are considered in the following points below:
Neglects the behavior of whole economy
Neglects aggregate output and general price level of the economy
Neglects foreign invasion on policy making
Neglects monopoly factors
Except autocratic nation

1.6 Organization of the study

The study is divided into five (5) different chapters. Chapter one of the study consists of
the introduction which includes; background of the study, statement of the problems,
obj of the study, significance of the study, limitations of the study and the org of the
study. Chapter two consists of review of literature which includes government taxation
affects microeconomic level, price regulation, monetary and financial policy, and
consumers protection. Chapter three include methodology, similarly chapter four and
five consist of analysis and interpretation, and conclusion respectively.
LITERATURE REVIEW

2.1 Theoretical literature review

Although market forces are frequently seen as the driving forces behind
microeconomics interactions, the government also has a significant impact on how
these interactions perform. As microeconomics looks at the economic behaviors of
individuals, households, and companies. When government brings out new tax policy,
fiscal policy, monetary policy, tariffs, regulations, or subsidies, these changes affect
individual choices (Rachelle, Oct-27, 2022).

Government taxation affects microeconomic level

Taxes are more complicated than price and quantity, as they involve a third economic
player i.e. the government. Government is financed with the help of taxes from
individuals and firms. If government impose high rate of income tax then the savings of
the individual decreases. High sales tax on alcohol items may discourage an
individual’s buying behavior (Ross, Aug-28, 2023).

Price regulation

The government can regulate prices in certain industries to maintain fair competition.
Price control generally protect consumers by preventing price discrimination and
excessive rise in price. The government set price restrictions , particularly in critical
services like electricity and health care, to ensure affordability and defend consumer
interests (Anon. n.d.)

Monetary and financial policy, and their regulation

The government formulates and implements monetary policy through central bank (like
NRB) or monetary authority to manage key microeconomics as well as
macroeconomics variables. A steady monetary policy should be maintained by the govt
to manage price stability, inflation, and money supply, which indirectly impacts
individual, households and firms (Anon. n.d.). To safeguard the stability of financial
markets and institutions, the govt regulates proper financial policy and monitor them.
Consumer protection

Government undertake consumer protection policies to safeguard individuals’ interests

and to promote fair and transparent business practices. Consumer protection act is
implemented strictly which includes anti-fraud rules, fairness in economic transaction,
and safe and legal market for buying and selling of goods and services (Anon. n.d.). So,
this can help individuals and firms to operate their all economic activities smoothly.

Overall, the literature review gives useful insights about the role of govt policies in
microeconomics. It highlights how taxation affects microeconomics levels, role of price
regulation, monetary and financial policy, further study go deeper into the consumers
protection policies and acts.
METHODOLOGY

The study of ‘Government Policy and Its Impact on Microeconomics’ is done on the
base of theoretical literature review by exploring different necessary sources of data,
tools and techniques.
3.1 Research design

In this study, descriptive research design is applied to elaborate the topic briefly and
deeply. It is non-experimental and provide general overview of the subject.

3.2 Conceptual framework

Income tax
Monetary &
Financial Policy
Individuals
Income & Saving
Government
Subsidies

Dependent
Independent variables

variable

In the above conceptual framework, income and saving of any individual is directly of
indirectly affected by taxation, monetary and financial policy, and government subsides.
If the government impose very less rate of income tax then the individual can save
more.

3.3 Sources of data

The study is conducted by exploring the secondary sources of data through auth means
and medium. Mostly qualitative and descriptive data are collected for the study.

3.4 Tools and techniques

Data are collected through desk study and later analyzed through thematic analysis.
Qualitative technique is used in this study based on descriptive research design.
ANALYSIS AND INTERPRETATION

Government policy has a significant impact on microeconomics and its variable. It can
influence the behavior of individuals and firms by implementing incentives and inputs
 that shape individual decisions.

4.1 First objective

Indirect taxes, subsidies, and price controls are some of the ways in which governments
intervene in markets of the economy. It directly impacts, individuals, firms and the
overall functioning of markets.

4.2 Second objective

Monetary policy and financial policy should be deploy in a systematic manner
considering the necessary microeconomic indicators. When it comes to government
interference in microeconomics, a fine balance must be achieved.

4.3 Third objective

Excessive rules and inefficient bureaucratic processes can damage market dynamics and
entrepreneurship. Anti-competitive government actions discourage anti-competitive
practices, safeguard consumer rights, and stimulates innovation. This results in cheaper
prices, more product variety, and higher quality for consumers.

That’s why, the government’s position in microeconomics is complex and critical. To

promote economic efficiency, societal welfare, and individual liberties, policymaker
must find a balance between government involvement and market forces.

CONCLUSION

The role of government policy in microeconomics has interconnected relation with one
another. It is important to remember that no economic system is completely free from
government interference. The government has an important role in maintaining tax rate,
protecting consumer interests, and creating a fair business environment. The challenge
is to find out the right balance between necessary government policies and ensuring that
the policies adopted produce optimal outcomes for individuals, households, firms, and
the economy as a whole.
References

Rachelle, October-27, 2022 “The Importance Of Microeconomics In Public Policy”

Ecusocmin. Retrieved November-04, 2023 (https://www.ecusocmin.org/the
importance-of-microeconomics-in-public
policy/#:~:text=A%20government%E2%80%99s%20implementation%20of%20polici
es%20that%20alter%20inputs,subsidies%2C%20legal%20tender%20laws%2C%20lice
nsing%2C%20and%20public-private%20partnerships.)
Ross, Sean, August-28, 2023 “How Does Government Policy Impact
Microeconomics?” Investopedia. Retrieved November-04, 2023
(https://www.investopedia.com/ask/answers/032515/how-does-government-policy
impact
microeconomics.asp#:~:text=Government%20policy%20influences%20microeconom
ics%20by%20implementing%20incentives%20and,rate%20policy%2C%20regulations
%2C%20tariffs%2C%20and%20subsidies%2C%20among%20others.)

Anon. n.d. “Government Policy” Collins Dictionary. Retrieved November-04, 2023

(https://www.collinsdictionary.com/dictionary/english/government-policy)

Bondarenko, Peter, October-06, 2023 “Microeconomics” Britannica. Retrieved

November-05, 2023 (https://www.britannica.com/money/topic/microeconomics)

Anon. n.d. “THE ROLE OF GOVERNMENT” IB ECONOMICS. Retrieve

November-05, 2023 (https://www.ibeconomics.com/role-of-government-in
microeconomics.html)

Anon. n.d. “Monetary Policy” Wikipedia. Retrieve November-05, 2023

(https://en.wikipedia.org/wiki/Monetary_policy)

Anon. n.d. “Policy Fundamentals For Consumer Rights and Protections” AARP.
Retrieve November-05, 2023 (https://www.aarp.org/about
aarp/policies/fundamentals/consumer-rights-protections/)