Price Controls

Price Controls

Maximum Price Controls: This is when the government sets a maximum price, below the equilibrium price which prevents producers from raising the price above it. It is also called Price ceiling. Usually maximum prices are usually set to protect consumers and they are normally imposed in markets where the product in question is a necessity or a merit good.  The Government can set a legally imposed maximum price in a market that suppliers cannot exceed – in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price.
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
This is the other phenomenon of the maximum price. Sets above the equilibrium price, which prevents producers from reducing the price below it. Also known as the floor. A minimum price is a legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. Perhaps the best example of a minimum price is the minimum wage. The national minimum wage was introduced into the UK in 1999. It is an intervention in the labour market designed to increase the pay of lower-paid workers and thereby influence the distribution of income in society. In October 2005, the value of the minimum wage for adults was £5.05 – following a series of small increases over recent years.
The main aims of the minimum wage

1. The equity justification: That every job should offer a fair rate of pay commensurate with the skills and experience of an employee
2. 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
3. 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.
4.  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).