No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 133 Minimum wage legislation is one application of a price floor . The intent of any price floor is to raise the price above what the equilibrium price would otherwise be. In addition to minimum wages, a historically popular price floor has been for agricultural products. Lobbyists for agricultural interests have often been powerful enough to obtain legislation for price floors for their goods (we’ll address these “public choice” issues in chapter 14). Figure 6.2 illustrates the more general price floor. PRICE CEILINGS An alternative government price control is to restrict the maximum amount that may be charged for a particular good or service; this type of price control is referred to as a price ceiling . Ostensibly, this type of price control is to benefit a consumer. Yet, as our supply and demand analysis will show, price ceilings inevitably lead to shortages—hurting the very consumers that are supposedly helped. Of course certain consumers are helped. In the case of rent controls, those who have apartments for many years find that over time they are paying substantially less rent than the Price ceiling: a form of governmental price controls which restricts the maximum amount that can be charged for a good or service, resulting in a shortage. Figure 6.3, Price Ceilings. Rent control is a common application of price ceilings. The control of prices increases the demand for the service while supply is reduced, inevitably leading to a shortage at the price ceiling. This may take time as apartments are allowed to deteriorate and new housing is not constructed. P Q Q 1 D S Q S2 Q D2 <<Q D2 Q S2 P 2 P 1 Price Ceiling Shortage Figure 6.2, Price Floors. The minimum wage is only one example of a price floor, others include agricultural price supports. The general conclusion is that the same effect happens regardless of the intent of the price floor; quantity supplied will increase while private quantity demanded will decrease. In the case of agricultural price supports, the government will often step in to purchase the surplus, either for storage or “relief” to the poor or for export as part of foreign aid. P Q Q 1 D S Q D2 Q S2 < Q S2 Q D2 P 2 P 1 Price Floor Surplus Price floor: a form of governmental price controls which restricts the minimum amount that can be charged for a good or service, resulting in a surplus. GOD VALUES—AND REWARDS—ALL WORK, INCLUDING “FLIPPING HAMBURGERS” • Colossians 3:23-24 • Proverbs 13:11 • Proverbs 10:4-5