Question

What is your opinion when it comes to the government controlling prices? After looking at the economic arguments made in Chapter 6, what is your opinion of the idea of the Minimum wage increase to $15 pr hour? What is your opinion when it comes to rent control? Why do you think that the so many people might be for various price controls even with the arguments made in the chapter?

Answer 1

In economic terms, any kind of a minimum wage or rent control, is a type of price control. Price controls distort the market equilibrium, and cause deadweight loss.

For example, a minimum wage is a price floor. A minimum wage set higher than the equilibrium will lead to unemployment in the labor market.

Similarly, a rent control is a price ceiling. A rent set lower than the equilibrium will lead to shortage of apartments.

Ideally, the equilibrium price and quantity should not be disturbed. This can be shown in the following two diagrams:

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i) In the first diagram, a surplus is shown. For example, when minimum wage is set too high.

ii) In the second diagram, a shortage is shown. For example, when rent controls are set too low.

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Now, if minimum wage is raised further, the extent of surplus will also rise. In other words, unemployment will rise. This is because now more workers will enter the labor market due to the higher wages, but not everyone will get a job.

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With rent controls, the government sets a maximum rental value for a given city / area. If this is set lower than equilibrium, it leads to shortage of apartments. This is because sellers would not like to provide apartments at such a low price, but buyers would like more apartments. This may lead to black markets and quality degradation.

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Most people may be in favor of rent controls because people always consider their own individual benefits, rather than overall benefits.

For example, a job seeker will be happy with the micro view that a higher minimum wage is beneficial for him. However, he doesn't realize that it may lead to large scale unemployment. If he gets a job, he doesn't care about the others.

Similarly, if a person gets an apartment at a low rent, he doesn't care if there is a shortage of apartments elsewhere.

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Ideally, such problems can be eliminated if the forces of supply and demand are allowed to determine the equilibrium. However, the government has to intervene when there is a market failure, or some apparent injustice.