Price Floors Ceilings Government Price Controls in a

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 1981 1990 1991 1996 1997 2008 2009 $3. 10 $3. 35 $3. 80 $4. 25 $4. 75 $5. 15 $5. 85 $6. 55 $7. 25 California $8. 00 minimum wage rates higher than the Federal minimum wage rates the same as the Federal No minimum wage law American Samoa has special minimum wage rates lower than the Federal

Raise the Minimum Wage to $800/hr Benefits Costs

Minimum Wage: Gov’t Imposed Price Floor Minimum wage rises: 725/hr => 850/hr Min. Wage Workers Surplus of Supply QD . Q 1 Price Floor E 1 ------------ $725 ------------ $850 S 1 QS End Result: Less Workers hired! (Q 1 -QD) D 1

MARIN & Min. Wage Marin Minimum wage is approx. 800/hr Min. Wage Workers S 1 $900 . E 1 Price Floor $800 No Effect—(below market equilibrium) D 1

Rent Control Benefits Costs

Rent Control: Gov’t Imposed Price Ceiling imposed of $700 Apartments S 1 . $900 E 1 Price Ceiling ---------- $700 Result: Less apartments rented! (3000 -QS) Shortage of Supply QS 3, 000 QD D 1

Price Ceiling Continued…. Price Ceiling imposed of $1, 200 Apartments No Effect—(Above Mkt. Equilibrium) $1200 $900 . S 1 Price Ceiling E 1 D 1 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