Price Controls
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwUWTW396c8-ZkIbR4cipOW7vNAfYKrq2vxA0TAwsWhQMzM7SX_FvUDtctsoSSzhv3ru1ekXpBESVzkKqRwowwzyP9z2Il0vK7f7aadGxPCaNBKCtr6uQPFLyKuWX9P6wviy6fcydtBcQy/s320/as-marketfailure-maximum-prices_clip_image001.gif)
One example of a maximum price might when shortage of essential foodstuffs threatens large rises in the free market price. Other examples include rent controls on properties – for example the system of rent controls still in place in Manhattan in the United States.
A maximum price seeks to control the price – but also involves a normative judgement on behalf of the government about what that price should be. An example of a maximum price is shown in the next diagram. The normal free market equilibrium price is shown at Pe – but the government decides to introduce a maximum price of Pmax. This price ceiling creates excess demand for the product equal to quantity Q2-Q2 because the price has been held below the normal equilibrium.
Minimum Price Controls
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhN2RQYwbR3fmlcR7wTjHvS-bqi9bqw_-uCSlLs58kfNoxy1cGDpAab5hvIFrt7cs-7YspmZAoant3VqdWxxtfw7fBOod9C8tj4GYwgBwmqRnbWo4ho7SXcD-l8EJx2yXquId5soW6WW9m6/s320/as-marketfailure-minimum-prices_clip_image001.gif)
The main aims of the minimum wage
- The equity justification: That every job should offer a fair rate of pay commensurate with the skills and experience of an employee
- Labour market incentives: The NMW is designed to improve the incentives for people to start looking for work – thereby boosting the economy’s available labour supply
- Labour market discrimination: The NMW is a tool designed to offset some of the effects of persistent discrimination of many low-paid female workers and younger employees.
- An example of a maximum price controls are wage laws. Laws specifying the lowest wage a company can pay an employee (employees are suppliers of labor and the company is the consumer in this case). When the minimum wage is set higher than the equilibrium market price for unskilled labor, unemployment is created (more people are looking for jobs than there are jobs available).
No comments:
Post a Comment