Question

“Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences.”

In this 1-2 page paper, analyze what happens when a higher minimum wage is enacted (raising a price floor on the price of labor). Will the number of workers hired change? Why? What might be an unintended consequence of a higher minimum wage law designed to help low-income workers?

Next, analyze what happens when the price of rent is regulated so that prices are kept artificially low (a price ceiling). What will happen to the availability of apartments? Why? What might be an unintended consequence of a rent control wage law designed to help low-income renters?

Answer 1

As we observed in the above question if price floor is rised on the price of labor then number of worker hired will be incresed as raise in minimum wages will increase economic activity and promote job growth.

Unintended consequences will be :

1) Raising the minimum wage would increase poverty.

2) Raising the minimum wage would increase the price of consumer goods.

3) A minimum wage increase would hurt businesses and force companies to close.

4) Increasing the minimum wage reduces the likelihood of upward mobility.

Similarly in case of Rent is regulated below the price ceiling then there will be shortage of apartments as it will create more demand then supply which will create shortage of apartments. It is explained in below diagram:

Hence due to this strategy unintended consequences will be :

1) Increased in cost of living.

2) It destroys landlords' incentives to maintain the housing stock. With rent control in place, people are lined up for housing, and therefore, the landlord can discriminate on the basis of who will take the most meager accommodations.

3) It also create a “class system” with attendant perceived and unnecessary power struggles between landlords and renters.