Price controls are governmental restrictions on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of goods, to prevent during shortages, and to slow inflation, or, alternatively, to ensure a minimum income for providers of certain goods or a minimum wage. There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged.
Although price controls are sometimes used by governments, economists usually agree that price controls don’t accomplish what they are intended to do and are generally to be avoided. For example, nearly three-quarters of economists surveyed disagreed with the statement, “Wage-price controls are a useful policy option in the control of inflation.
A price ceiling is a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation or in monopolistic markets. In spite of these goals, a price ceiling can cause problems if imposed for a long period without controlled rationing, and can lead to shortages. Furthermore, price ceilings can lead to serious problems if a government sets unrealistic prices. In an unregulated market economy price ceilings do not exist
A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product. A price floor must be higher than the equilibrium price in order to be effective.
A price floor can be set below the free-market equilibrium price. In the first graph at right, the dashed green line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price.
By contrast, in the second graph, the dashed green line represents a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market. It ensures prices stay high so that product can continue to be made.
Effect on the market
A price floor set above the market equilibrium price has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production.
Taken together, these effects mean there is now an excess supply (known as a “surplus”) of the product in the market to maintain the price floor over the long term. The equilibrium price is determined when the quantity demanded is equal to the quantity supplied.
In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable. Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), externalities, taxes or subsidies, and binding price ceilings or floors (including minimum wages). The term deadweight loss may also be referred to as the “excess burden” of monopoly or taxation.
For example, consider a market for nails where the cost of each nail is 10 cents and the demand will decrease linearly from a high demand for free nails to zero demand for nails at $1.10. In a perfectly competitive market, producers would have to charge a price of 10 cents and every customer whose marginal benefit exceeds 10 cents would have a nail. However, if there is one producer who has a monopoly on the product, then they will charge whatever price will yield the greatest profit. For this market, the producer would charge 60 cents and thus exclude every customer who had less than 60 cents of marginal benefit. The deadweight loss is then the economic benefit foregone by these customers due to the monopoly pricing.
Conversely, deadweight loss can also come from consumers buying a product even if it costs more than it benefits them. To describe this, let’s use the same nail market, but instead it will be perfectly competitive, with the government giving a 3 cent subsidy to every nail produced. This 3 cent subsidy will push the market price of each nail down to 7 cents. Some consumers then buy nails even though the benefit to them is less than the real cost of 10 cents. This unneeded expense then creates the deadweight loss: resources are not being used efficiently.
If the price of a glass of wine is $3.00 and the price of a glass of beer is $3.00, a consumer might prefer to drink wine. If the government decides to levy a wine tax of $3.00 per glass, the consumer might prefer to drink beer. The excess burden of taxation is the loss of utility to the consumer for drinking beer instead of wine, since everything else remains unchanged.
Price Controls, Subsidies, and the Risks of Good Intentions
A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy.Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates).
Furthermore, they can be broad or narrow, legal or illegal, ethical or unethical. The most common forms of subsidies are those to the producer or the consumer. Producer/production subsidies ensure producers are better off by either supplying market price support, direct support, or payments to factors of production.Consumer/consumption subsidies commonly reduce the price of goods and services to the consumer. For example, in the US at one time it was cheaper to buy gasoline than bottled water.
Whether subsidies are positive or negative is typically a normative judgment. As a form of economic intervention, subsidies are inherently contrary to the market’s demands. However, they can also be used as tools of political and corporate cronyism.
Con : counterproductive
Market Failures, Taxes, and Subsidies
What is ‘Market Failure’
Market failure describes any situation where the individual incentives for rational behavior do not lead to rational outcomes for the group. Put another way, each individual makes the correct decision for him/herself, but those prove to be the wrong decisions for the group. In traditional microeconomics, this is shown as a steady state disequilibrium in which the quantity supplied does not equal the quantity demanded.
BREAKING DOWN ‘Market Failure’
A market failure occurs whenever the individuals in a group end up worse off than if they had not acted in perfectly rational self-interest. Such a group either incurs too many costs or receives too few benefits. Even though the concept seems simple, it can be misleading and easy to misidentify.
Contrary to what the name implies, market failure does not describe inherent imperfections in the market economy — there can be market failures in government activity, too. One noteworthy example is rent seeking by special interest groups. Special interest groups can gain a large benefit by lobbying for small costs on everyone else (such as through a tariff). When each small group imposes its costs, the whole group is worse off than if no lobbying had taken place.
Additionally, not every bad outcome from market activity counts as a market failure. Nor does a market failure imply that private market actors cannot solve the problem. On the flip side, not all market failures have a potential solution, even with prudent regulation or extra public awareness.
Common Types of Market Failure
Commonly cited market failures include externalities, monopoly privileges, information asymmetries and factor immobility. One easy-to-illustrate market failure is the “public good problem.” Public goods are goods or services which, if produced, the producer cannot limit its consumption to paying customers.
Public goods create market failures if some consumers decide to not pay but use the good anyway. National Defense is one such public good because each citizen receives similar benefits regardless of how much they pay. It is very difficult to privately produce the optimal amount of national defense. Since governments cannot use a competitive price system to determine the correct level of national defense, this may be a market failure with no pure solution.
Solutions to Market Failures
There are many potential solutions for market failures. Asymmetrical information is often solved by intermediaries or ratings agencies — investors rely on Moody’s and Standard & Poor’s to inform about securities risk; Underwriter’s Laboratories LLC performs the same task for electronics. Negative externalities, such as pollution, are solved with tort lawsuits that increase opportunity costs for the polluter. Tech companies that receive positive externalities from tech-educated graduates can subsidize computer education through scholarships.
If businesses hire too few teenagers or immigrants after a minimum wage increase, the government can create exceptions for younger or less-skilled workers. The 1978 Airline Deregulation Act solved the underproduction of cheap air travel by allowing new price and business competition. One popular public good, radio broadcasts, elegantly solved the non-excludable problem by packaging periodic paid advertisements with the free broadcast.
A wage subsidy is an employer incentive & GST inclusive to encourage businesses to hire, train, and retain eligible job seekers.
The payments seek to assist employers to expand their businesses and provide eligible job seekers with a job.
Apprenticeships and traineeships are also eligible for a wage subsidy.
Employers who decide to hire a job seeker after his or her National Work Experience Programme ends, may also be eligible for a wage subsidy.
Wage subsidies ‘can help PMEs get jobs’
But skills and experience are still the main criteria for hiring, say employers
Wage subsidies will make older, local white-collar job seekers more attractive to companies, but companies are unlikely to create new positions for these professionals, managers and executives (PMEs).
Instead, they will focus on a candidate’s skills and relevant experience in deciding whether to hire him for existing vacancies, 10 companies told The Straits Times.
They were responding to Manpower Minister Lim Swee Say’s announcement on Wednesday that the Government will subsidise the wages of older local PMEs who have been unemployed for at least six months, to encourage companies to hire them. Under this two-year pilot programme which kicks off on Oct 1, a company will receive between $7,200 and $12,600 a year for hiring a jobless PME aged between 40 and 49; and between $14,400 and $25,200 a year for hiring an unemployed PME aged 50 and above.
In addition, changes will be implemented to make it tougher to hire foreign professionals. For example, firms may be asked to show proof that they had tried to hire Singaporeans for vacancies.
According to the Ministry of Manpower’s latest labour force report, there were around 9,000 Singapore citizens and permanent residents aged 40 and above who were unemployed for at least 25 weeks as of June last year.
“The scheme aims to give out-of-work PMEs, who struggle to find employment, a leg-up,” said West Coast GRC MP Foo Mee Har, a member of the Government Parliamentary Committee for Manpower.
Companies said that they welcomed the additional measures to boost local employment. “It is an instrument to level the playing field between young and old, and between older local PMEs and foreign talent,” said Mr Philip Kwang, managing director of high-tech lighting company Facade Global Master.
But their chief concern is whether the candidate is a good match in terms of skillsets, experience and personality. “It is expensive to train new workers, so if I’m hiring someone, I am looking to do so for the long term,” said Ms Angeline Tan, who runs clothesline firm Ezzi Living.
The stakes of hiring someone are higher for small- and medium-sized enterprises such as her company, where the resources are limited, Ms Tan added.
Mr Victor Tay, chief operating officer of the Singapore Business Federation, said that for the scheme to work, it takes “two hands to clap”.
Ms Ong Siew Kim, senior general manager of credit bureau DP Information Network, said: “After one year, we will assess, and the employees have to earn their salary in their own right. They have to be an asset to the company.”PUBLISHED
JUL 10, 2015
Wage Credit Scheme (WCS)