<Standard E.2.8 ...................................................................................................................................Standard E.2.10>

Demonstrate how government wage and price controls, such as rent controls and minimum wage law, create shortages and surpluses.

Focus Question: How do government policies impact shortages and surpluses in the economy?

rotating gif.gifLink to information on minimum wages and living wages

external image A_Price_Ceiling_Example_-_Rent_Control.jpg
The original intersection of demand and supply occurs at E0.
  • If demand shifts from D0 to D1, the new equilibrium would be at E1—unless a price ceiling prevents the price from rising.
  • If the price is not permitted to rise, the quantity supplied remains at 15,000.
  • However, after the change in demand, the quantity demanded rises to 19,000, resulting in a shortage.

Why do governments intervene in markets?

  • To correct market failures
  • To combat market inequities through regulation, taxation and subsidies
  • It also intervenes to promote general economic fairness
  • Also, maximizing social welfare for the people
  • Maintains competition
  • Stabilize the economy
  • Provide a legal system

Why is government intervention necessary?
  • Government intervention is necessary to redistribute income within the society.
  • Government intervenes to ensure that people are not being taken advantage of by the market.
  • The government also helps to ensure that all social services are available to all people at a reasonable price.
  • The government also enacts laws that protect people and making sure there is equal treatment and respect for property rights.

However, government intervention has to be restricted because too much of it will cause market failure e.g. command economies

What causes government failure?
  1. Levels of bureaucracy
  2. Lack of incentives
  3. Political interference
  4. Lack of consistency
  5. Nepotism and corruption
  6. Regulatory capture
  7. Moral hazard
Government Failure

Government role in markets:Lesson Plan

'Price Ceiling'

A price ceiling is the maximum price a seller is allowed to charge for a product or service. Price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices. Price ceilings are often set for essential expenses; for example, some areas have rent ceilings to protect renters from climbing rent prices.

Read more: Price Ceiling https://www.investopedia.com/terms/p/price-ceiling.asp#ixzz5EAsywXDU

See the source image
See the source image

Disadvantages of Price Ceilings

Price ceilings, while advantageous for many reasons, can also carry disadvantages. For example, in the 1970s, when the government imposed a price ceiling on gasoline prices, the price of gas was relatively low. To take advantage of those low prices, consumers waited in long lines to buy gas. In addition to the inconvenience of having to spend a lot of time getting gas, this caused a shortage. Arguably, if the government had simply let prices increase, consumers would have been forced to conserve, lines would have stayed short and a shortage may not have ensued.
Another risk of price ceilings is retailers may attempt to get around these regulations with fees. For example, a business may sell an item below the price ceiling but may assess fees for related products or services to indirectly drive up the price past the ceiling.

Read more: Price Ceiling https://www.investopedia.com/terms/p/price-ceiling.asp#ixzz5EAtYZGGJ

Price Floor

A floor is the lowest acceptable limit as restricted by controlling parties. Floors can be established for a number of factors, including prices, wages, interest rates, underwriting standards and bonds. Some types of floors, such as underwriting floors, act as mere guidelines while others, such as price and wage floors, are regulatory constraints that restrict the natural behavior of free markets.

Read more: Floor https://www.investopedia.com/terms/f/floor.asp#ixzz5EAu0pDr9
See the source image
See the source image

Rent Control Laws

Rent Control Laws by State

6 Things You Need to Know about Rent Control

Minimum Wage Laws

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Brief History of Minimum Wage Laws from Time Magazine.

Fair Labor Standards Act of 1938: From U.S. Department of Labor
Note: This Pro Minimum Wage article Reflects current Administration thinking.

Multimedia.pngMilton Friedman Opposes Minimum Wage Laws from YouTube


An article from the University of Texas about how raising the minimum wage would positively effect women of color and the poverty cycle (depicted below)

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Rent Controls

Watch this short video to get a basic understanding of how price ceilings can cause shortages in the housing market.

primary_sources.PNGRent Control In The New Millennium By National Housing Institute (NIH)
Note: The NIH is an advocacy group with a pro-rent control stance. However, the article provides
a good history of Rent Control.

primary_sources.PNGHow Rent Control Drives Out Affordable Housing a conservative perspective by Cato Institute

This YouTube video explains the nuances of the rent control debate.