Question

This is a graded discussion: 100 points possible Discussion Question 4 Identify arguments for and against wage and price controls as a policy tool of the government.

Answer 1

Price control measures can be of two types : price ceiling and price floor . Wage controls are usually price floors where the wage rate is restricted from reaching equilibrium as equilibrium wage is too low .

Now some advantages of price controls are that : In case of ceilings producers cannot charge an exorbitant high price for a necessary good like medicines . They cannot engage in price gouging . Also in case of price floors producers cannot pay very little market wage rate to workers . If government feels price of agricultural products are too low and farmers are being deprived then they put a price floor on such products . So price control measures save consumers and producers both from exploitative market equilibrium prices ,

Some disadvantages of price controls : Price floors like wage controls causes unemployment in the economy and demand for workers falls below supply . Price ceilings causes scarcity in the economy . People demand more at a ceiling but suppliers supply less , as for example in rent ceiling , supply of apartments fall and demand rises causing more people to be homeless . It creates dead weight less since it is a distortion of free market equilibrium . So reduces total welfare in the economy .