Price Floors & Ceilings Government Price Controls in a Free Market?

Price Floors & Ceilings Examples of Government Price controls Changing the result of the invisible hand They were used in the 1970’s but are rarely used in the U.S. economy today. They generally reduce efficiency!

Federal Minimum Wage History 1980 $3.10 1981 $3.35 1990 $3.80 1991 $4.25 1996 $4.75 1997 $5.15 2007 $5.85 2008 $6.55 2009 $7.25 California $8.00        minimum wage rates higher than the Federal   minimum wage rates the same as the Federal No minimum wage law minimum wage rates lower than the Federal American Samoa has special minimum wage rates

Raise the Minimum Wage to $800/hr Benefits Costs

. Min. Wage Workers Minimum Wage: Gov’t Imposed Price Floor S1 $850 Minimum wage rises: 725/hr => 850/hr Min. Wage Workers Surplus of Supply S1 Price Floor $850 . ----------------------- QD QS $725 End Result: Less Workers hired! (Q1-QD) E1 D1 Q1

. MARIN & Min. Wage Min. Wage Workers Marin Minimum wage is approx. 800/hr Min. Wage Workers S1 . $900 E1 Price Floor $800 D1 No Effect—(below market equilibrium)

Rent Control Benefits Costs

. Price Ceiling imposed of $700 Rent Control: Gov’t Imposed Price Ceiling Price Ceiling imposed of $700 Apartments S1 . Result: Less apartments rented! (3000-QS) $900 E1 Price Ceiling $700 ---------- QS QD D1 Shortage of Supply 3,000

. Price Ceiling Continued…. S1 $1200 E1 D1 Price Ceiling imposed of $1,200 Apartments No Effect—(Above Mkt. Equilibrium) S1 . $1200 Price Ceiling $900 E1 D1 3,000

Summary Price floors: (example: min. wage) Above market equilibrium cause a surplus of supply The market shrinks! (less goods are sold!) Below market equilibrium have no effect Price Ceilings: (example: rent control) Below market equilibrium cause a shortage of supply The market shrinks (less goods are sold) Above market equilibrium have no effect

PRICE FLOOR