The Concept of Price Ceiling and Price Floor
Discuss about The Concept of Price Ceiling and Price Floor.
Answer:
a) Price floor on the price of labor
Price ceiling and price floors are some of the policies applied by government of a given state to c
ontrol prices offered on goods and services. In economics, a minimum wage set is considered as a price floor which is the lowest price to be offered by the employers to their employees. The price floor is always created by the government to enable provision of good and quality services. However setting high minimum wage has got consequences.
Impact of raising a price floor on the price of labor
The minimum wage policy is always applied above the equilibrium. When minimum wage is applied in to the labor market, labor demand and supply change. According to economic theory, high minimum wage leads to workforce surplus since many qualified people are willing and able to provide services but are no able to get jobs (Dixit, 2012).). Those who are already employed retain their jobs since employers always create ways to deal with price floors with majority avoiding laying off technique since acquiring new employees tend to expensive. This model is quite expensive for investors thus no creation of new jobs through investments and finally results into unemployment.
b)Rent ceiling
Rent ceiling is a model used by the government to control rental prices so that low income earners can find places to reside. It places maximum rent charges to be laid on tenants by the landlords. Rental just like minimum wage bill leads to apartment shortages as the available rentals cannot support the tenants who are able to afford the rentals (Krueger, 2014)). Rent ceiling enables low income earners with the opportunity to acquire apartments. Moreover, rent ceiling hinders new investments in housing sector leading to surplus of tenants as well as poor housing system.
Reference
Dixit, A. (2012). Irreversible investment with price ceilings. Journal of Political Economy, 541-557.
Krueger, A. O. (2014). The political economy of the rent-seeking society. The American economic review, 64(3), 291-303.
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