What type of price control is minimum wage

One solution is to tailor the ration to the needs of individuals: people with a long commute to work can be given a larger ration of gasoline. In World War II, community boards in the United States had the power to issue extra rations to particularly needy individuals.

The danger of favoritism and corruption in such a scheme, particularly if continued after the spirit of patriotism has begun to erode, is obvious.

One way of ameliorating some of the problems created by rationing is to permit a free market in ration tickets. The free exchange of ration tickets has the advantages of providing additional income for consumers who sell their extra tickets and improving the well-being of those who buy.

Also, a white market in ration tickets will not necessarily cause the product sold to be moved to the same regions of the country where the tickets are sold. Thus, a white market will not necessarily eliminate regional shortages. With all of the problems generated by controls, we can well ask why they are ever imposed and why they are sometimes maintained for so long.

The answer, in part, is that the public does not always see the links between controls and the problems they create. The elimination of lower-priced lines of merchandise may be interpreted simply as callous disregard for the poor rather than a consequence of controls.

But price controls almost always benefit a subset of consumers who may have a particular claim to public sympathy and who, in any case, have a strong interest in lobbying for controls. Minimum-wage laws may create unemployment among the unskilled or drive them into the black market, but minimum wages do raise the income of those poor workers who remain employed in regulated markets.

Rent controls make it difficult for young people to find an apartment, but they do hold down the rent for those who already have an apartment when controls are instituted see rent control. General price controls—controls on prices of many goods—are often imposed when the public becomes alarmed that inflation is out of control.

In the twentieth century, war has frequently been the occasion for general price controls. Here, the case can be made that controls have a positive psychological benefit that outweighs the costs, at least in the short run. Surging inflation may lead to panic buying, strikes, animosity toward racial or ethnic minorities who are perceived as benefiting from inflation, and so on. Price controls may make a positive contribution by calming these fears, particularly if patriotism can be counted on to limit evasion.

This was the limited case for controls made by Frank W. Toward the end of World War II, more than fifty leading economists, including friends of the free market such as Frank H. However, most inflation, even in wartime, is due to inflationary monetary and fiscal policies rather than to panic buying.

To the extent that wartime controls suppress price increases produced by monetary and fiscal policies, controls only postpone the day of reckoning, converting what would have been a steady inflation into a period of slow inflation followed by more rapid inflation. Also, part of the apparent stability of the price indexes under wartime controls is an illusion. All of the problems with price controls—queuing, evasion, black markets, and rationing—raise the real price of goods to consumers, and these effects are only partly taken into account when the price indexes are computed.

When controls are removed, the hidden inflation is unveiled. Inflation is extremely difficult to contain through general controls, in part because the attempt to limit control to a manageable sector of the economy is usually hopeless.

John Kenneth Galbraith , in A Theory of Price Control, which was based on his experience as deputy administrator of the Office of Price Administration in World War II, argued that the prices of goods produced by large industrial oligopolists were relatively easy to control.

These firms had large numbers of administrators who could be pressed into service—administrators who were willing, moreover, to shift their allegiance from their employers to the government, at least during the war.

Galbraith overstated the market power of large firms, most of which were in highly competitive industries. Resources follow prices, and supplies tend to rise in the uncontrolled sector at the expense of supplies in the controlled sector. Thus, a government that begins by controlling prices on selected goods tends to end with across-the-board controls. The attempt to confine controls to a limited sector of highly concentrated industrial firms simply did not work.

A second problem with general controls is the trade-off between the need to have a simple program generally perceived as fair and the need for sufficient flexibility to maintain efficiency.

Creating an appearance of fairness requires holding most prices constant, but efficiency requires making frequent changes. Adjustments of relative prices, however, subject the bureaucracy administering controls to a barrage of lobbying and complaints of unfairness.

At first, relative prices were changed frequently on the advice of economists who maintained that this was necessary to eliminate problems in specific markets. However, mounting complaints that the program was unfair and was not stopping inflation led to President Franklin D. Whatever its defects as economic policy, the hold-the-line order was easy to justify to the public.

The best case for imposing general controls in peacetime turns on the possibility that controls can ease the transition from high to low inflation. If a tight monetary policy is introduced after a long period of inflation, the long-run effect will be for prices and wages to rise more slowly. Minimum wage laws sometimes have unintended consequences. Nations with progressive income tax systems require individuals to pay more taxes as their income increases.

Setting a high minimum wage or using incremental increases can force individuals into higher tax brackets. Price controls in a free market economy can distort the basic theory of supply and demand. Businesses often make decisions based on the supply and demand concept.

For example, when consumer demand for certain products increases, companies must increase their production output to meet this demand. Increasing supply usually requires additional labor. Companies may forgo additional labor if government price controls force companies to pay employees higher wages than the job position is worth. Minimum wage laws may create difficulties for higher paid workers.

Federal governments often revisit their minimum wage laws to ensure nonskilled workers are adequately compensated for their services. Consider Figure 4. The calculation of market surplus before policy intervention should be straight forward by now. Market surplus is equal to the sum of consumer surplus and producer surplus, calculating from Figure 4. The calculation of market surplus after intervention is less obvious. Consumers have lost surplus in some areas, but gained surplus in others we will look at this closely in the next Figure 4.

Producers have lost surplus. Looking before and after we see that producer surplus has decreased and consumer surplus increased — but the decrease in producer surplus outweighed the effects of the increase in consumer surplus, causing deadweight loss. This means that the market is less efficient, because by removing the regulation, the market as a whole is better off.

As mentioned previously, the quantity supplied in the market decreases from rental units to This means that renters can no longer find homes. We can assume that the consumers who are willing to pay most for the homes will end up with the rental units they will start looking earlier, exploring more options etc. This is shown in Figure 4. The price ceiling causes the landlords to reconsider staying in the rental market, as fewer landlords can make a profit with the lower price.

This causes landlords to leave the market, reducing their producer surplus to nothing. Like consumers, some producers will remain in the market, but these producers now have to face the reality of lower rent revenue. Notice that Area A was a transfer from the landlords to the renters who remain in the market. It is important to recognize that this transfer is a result of the price effect of the policy, meaning it occurred because price differed from equilibrium.

Alternatively, the deadweight loss results because there are players who are no longer able to be a part of the market. This change is a result of the quantity effect on the policy, meaning it occurred because quantity differed from equilibrium.

A change in quantity from the equilibrium value is the only thing that causes a DWL. Changes in price will cause transfers. While the two effects work together, it is important to be able to distinguish between the two. This was a fairly lengthy explanation of price ceilings, but it is one that will lead into the discussion of all policy. Every policy we will look at in microeconomics has both a quantity effect and a price effect, and it is important to understand how the policy impacts individual market players.

While the price floor has a very similar analysis to the price ceiling, it is important to look at it separately. A common example of a price floor is a minimum wage policy.

The labor market is unique in that the workers are the producers of labor and the firms are consumers of labor. Price can be denominated in hourly wage, with the quantity of workers on the x-axis. If the government sets a binding minimum wage price floor , it must be set above the equilibrium price. In Figure 4.