Discuss About The Mercator Research Institute Commons Climate.
This specific assignment will emphasize over the two price control mechanisms price floor and price ceiling. The price ceiling is used to lower the price level prevailing in the market while the price floor is used to raise the price level. In the context of price ceiling the organizations will not be able to raise the price level above the ceiling while the price level could not be decreased in the context of price floors. In addition to this it will also discuss about the appropriateness of the minimum wage law of the Australian government and emphasize whether this should be practiced further or not.
Market failure is said to occur when the market demand is not equated with the market supply. This gives rise to inefficient market outcomes which can be corrected by the government through changing the incentive structure of effectively allocating the resources or through the implementation of price ceiling or price floors. The more efficient interpretation of market failure would be a situation where the economic agents are not properly incentivized for driving the economy towards the equilibrium (Perkis et al., 2016). A market failure adversely affects the economy because of the non-efficient allocation of the resources available. In the words of Plott et al., (2018), the opportunity cost associated with the resources used in creating the product or the social cost of manufacturing the goods or services if not minimized and this leads to resource wastage.
In certain cases the government intervene into the market to control the prevailing price level in the market and implements a few strategies like price floors and price ceilings. The first instance of government intervening the market is the imposition of a price ceiling. A price ceiling is said to take place when the price is deliberately set at a level lower than that of the equilibrium price level and is not allowed to increase further (Perkis et al., 2016). There are several instances of price ceilings which can be cited as an example. In most of the cases the imposition of price ceiling involves the government intervention. Such as in many cities there are certain rent control measures. The implementation of rent control signifies that the maximum amount of rest that can be charged is set by a government agency. It is also necessary to mention that this maximum rent is allowed to increase a certain percentage every year in order to cope with the prevailing inflation although it will be so designed that the rent remains below the equilibrium level (Vasigh and Fleming, 2016). Another example of price ceiling can be observed in the context of the pricing of gasoline. During 1973 through 1981 there was a price ceiling imposed on the price level of gasoline, the law has set a maximum price for gasoline any owner of the gas station charging price more than that would be held guilty for business malpractice and violating the law. The concept of price ceiling could be explained easily with the help of the following diagram.
If it is assumed that the price of gasoline at the equilibrium level is $2.00 per gallon and this is the market clearing price of Gasoline. Here the government intervene the market and sets the price of gasoline at $1.50 per gallon as the maximum price that can be charged by the sellers. At the price set by the government the quantity demanded for gasoline is 10 million gallons while the quantity supplied is 5 million gallons. Hence there is a shortage of 5 billion gallons of gasoline. Therefore it can be stated that price ceiling leads to shortage.
The rationing problems that arise because of the shortage is mitigated by the government through a few strategies. The primary problem is who will get the product and who will not. The most commonly used strategy to solve this problem is to provide the product on a first come first served basis (Edenhofer et al., 2017). Another effective method of resolving the problem is to conduct a lottery. Through this the people who have picked the right numbers will be allowed to buy the products.
The impact of price ceiling generally benefit the buyers and adversely affect the sellers. Sellers would try to avoid this loss if it is possible. The most common way of doing so is termed as the black market. In such a situation the seller raises the price of the product illegally and hope to get away with it (Pahle, 2017). On the other hand, there are grey markets as well where the sellers charge for the products which were initially provided free of cost and this is not an illegal activity as well. for instance if the landlord cannot raise the rent after a certain level he or she can charge for the parking space, charge for the use of elevator and many more.
A price floor is said to exist when the price level is intentionally held above the equilibrium level and is not allowed to fall. Several examples of price floors are there, in certain cases the private businesses maintain a price floor while in some cases the government maintains a price floor. A case of price floor which was maintained by the private businesses is termed as fair trade. In the context of fair trade the manufactures used to determine and set a price of the products and used to inform the retailers that price could not be lowered that that level otherwise the store would not be allowed to sell any of the products from that manufacturer (Mankiw, 2014). During the time period of 1930 to 1980s this practice was legal and even now sometimes this practice is conducted. There were several items which were fair traded such as television sets, washing machines, stereo amplifiers and many more.
The figure above depicts the market scenario for stereo amplifier. It is quite evident from the diagram that the equilibrium price for stereo amplifier is $200. However, the manufacturer has set a price floor at $300 and hence price is not allowed to fall below that level. The quantity demanded of stereo amplifier is 500000 while the supply of the same is 1000000. There is a surplus of 500000 and therefore it can be stated that price ceiling always creates surplus.
There are several processes through which this problem if surplus can be mitigated. For instance there was a store that simply broke the policy of the manufacturer and lowered the price level so as to sell away the surplus (Kaufman, 2016). Despite of being threatened by the manufacturer the retailer kept on selling the product at a lower price.
There are certain cases when it becomes necessary for the government to intervene in the market and control the operations of certain businesses. For instance if the firms operating in the same industry decide to hold the price at a higher level than that of the equilibrium level there will certainly be inefficient resource allocation. In such a case if the governments intervene and sets the price ceiling that would certainly be helpful for the buyers and the market will become stable. However the price ceiling should be set in accordance with the equilibrium so that it does not harm the producers as well (Bronfenbrenner, 2017).
It is needless to mention that like price ceiling the price floor also brings about a few unintended consequences. For instance the proponents of the minimum wage theory would be compelled to think twice whether they are helping the workers or not due to these consequences.
At the market clearing wage that is at the equilibrium wage the demand for and supply of labor is equal to each other. Now if the government sets the price floor above the market clearing wage as the Australian government has done, it will induce an excess supply of labor in the market (Herings, 2015). There will certainly be supply glut which means that there will be more worker who will be willing to work at that wage. This situation is termed as the emergence of unemployment.
In the figure above the equilibrium wage rate is W0 and at this wage rate the employers are demanding E0 number of employees and E0 number of people are applying for the jobs and hence the demand for labor becomes equal to the supply of labor. Now the government sets the price floor of wage rate at W1, now there are ES number of employees who are willing work at the wage offered by the organizations while with the increased wage organizations are demanding less workers ED. Therefore, there arises a surplus of ES-ED.
There are several problems that may arise because of the imposition of this price floor on the market clearing wage. In the long run the employer will respond immediately and cut back the number of employees. In further long run the manufacturer will change the production technique so that their demand for labor reduce (Sexton, 2015). For instance they can use more technology intensive production techniques use more machinery and equipment which will enable the existing workers yield better and increased output. Therefore, this will increase the productivity of the existing workers marginally given that more machinery in the workplace will enable the worker to produce more output in one hour.
The workplace environment may also worsen, when an employer is forced to pay more wages to the employees it will ensure that more people are willing to work for the organizations. The workers who are unemployed will always be ready to replace an existing worker and the organization will lose the incentive to make the workplace better. For instance it may reduce the break time or stop providing free lunch (Cowen and Tabarrok, 2015).
As a policy maker I would rather recommend that the Australian government should abolish the minimum wage. This is because this implementation of minimum wage will give rise to several difficulties along with a huge unemployment which is not good for the overall economic health of the country.
Conclusion
On a concluding note it can be stated that the discussion regarding the price ceiling and price floor mechanisms for controlling the pricing mechanisms may be useful in certain situations but are not good for the health of the economy. In both of the cases there are consequences which can affect the economy adversely. Hence it is not desired that the government implement any one of these mechanisms until and unless it becomes necessary.
Reference List
Bronfenbrenner, M., 2017. Income distribution theory. Routledge.
Cowen, T. and Tabarrok, A., 2015. Modern principles of economics. Palgrave Macmillan.
Edenhofer, O., Flachsland, C., Wolff, C., Schmid, L.K., Leipprand, A., Koch, N., Kornek, U. and Pahle, M., 2017. Decarbonization and EU ETS Reform: Introducing a price floor to drive low carbon investments. Mercator Research Institute on Global Commons and Climate Change (MCC) Policy Paper.
Hatfield, J.W., Plott, C.R. and Tanaka, T., 2015. Price Controls, Non-Price Quality Competition, and the Nonexistence of Competitive Equilibrium.
Herings, P., 2015. Equilibrium and matching under price controls.
Kaufman, B.E., 2016. Adam Smith’s Economics and the Modern Minimum Wage Debate: The Large Distance Separating Kirkcaldy from Chicago. Journal of Labor Research, 37(1), pp.29-52.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Perkis, D.F., Cason, T.N. and Tyner, W.E., 2016. An experimental investigation of hard and soft price ceilings in emissions permit markets. Environmental and Resource Economics, 63(4), pp.703-718.
Perkis, D.F., Cason, T.N. and Tyner, W.E., 2016. An experimental investigation of hard and soft price ceilings in emissions permit markets. Environmental and Resource Economics, 63(4), pp.703-718.
Plott, C.R., Roll, R., Seo, H. and Zhao, H., 2018. Tick Size, Price Grids and Market Performance: Stable Matches as a Model of Market Dynamics and Equilibrium.
Sexton, R.L., 2015. Exploring economics. Cengage Learning.
Vasigh, B. and Fleming, K., 2016. Introduction to air transport economics: from theory to applications. Routledge.
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