Markets, International Trade, & Government

• Donna Green

Governments have stepped in and set minimum and maximum prices ever since they have had control over the populace. Just in the United States alone, governments have predetermined the price of gasoline, added rent control to housing in New York City, and even fixed a minimum on unskilled labors wages. However, sometimes governments may tend to go past simply establishing price floors and price ceilings, and attempt to take over the prices of the general markets. This was done throughout World War I and World War II, as well as during the Korean War in the United States. The attraction of controlling prices is logical. These types of controls offer an assurance of protecting those that might be specifically hard-pressed to endure an increase to prices. Nevertheless, by doing so, the governments may sometimes fall short in shielding consumers and at the same time damage others.

In the first scenario we are faced with the government setting a price ceiling on gasoline. Price ceilings are created to prevent prices of a product from exceeding a set maximum. However, if this is not done with the utmost caution, and the price in which the ceiling is set is below the equilibrium, it can create a drastic shortage of the product. As seen in the graph below, in order to maintain an even flow between price and demand, the government would have needed to set a price ceiling of no less than approximately $50/barrel to avoid shortages back in June of 2012.

For example, 1973 and1979, the United States set a price ceiling on gasoline, which was below the equilibrium (Rockoff, 2008). This caused sellers to sale gas on a first-come-first-served basis, which also caused many consumers to have to wait in extensive lines to acquire gasoline as well as creating shortages. This is just one obvious example of the kind of chaos that can be created from the government setting a price ceiling on the gasoline market. That being said, a price ceiling can be a good thing at times. In 2005, Hurricane Katrina was on its way to impact the southeast United States coast. As impact was determined and warnings went out, many convenient stores significantly raised their gasoline prices overnight. This is known as price gauging. It is against the law, and a price ceiling is one way of preventing these types of circumstances from taking place and abusing consumers. These laws also apply to the other end of the spectrum to protect the populace.

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There is also a flip side to price ceilings where the government may set a minimum price. In the second scenario we have the government setting a minimum wage for unskilled laborers also called minimum wage. This is called a price floor. In 1992 a survey of economists was published asking them about general controls. With the statement made, “Wage-price controls are a useful policy option in the control of Inflation,” there were only 8.4% who agreed, there were 17.7% who agreed with qualifications, but the majority of 73.9% disagreed (Alston et al. 1992, p. 204). The price floor on wages could causeunemployment levels to rise, although they do increase the overall income of laborers in the regulated markets. As we see in the chart below, minimum wage versus the job market is inelastic, meaning that as minimum wage rises, the amount of employed laborers falls, increasing unemployment rates. Do to inflation, minimum wage does need to be adjusted to a degree, however, that degree is a very sensitive one, and governments must take this into consideration. Price ceilings floors, however, are not the only issues that can