Question

Identify arguments for and against wage and price controls as a policy tool of the government.

Answer 1

Arguments in favour of wage and price controls Wage control such as a minimum wage raises the standards of living of those who get a job at higher wage. It thus helps in raising social welfare. Price controls like price ceiling makes a product affordable to a large section of society. Price floor such as price support programs help the producers of certain commodities such as dairy farmers and cereal farmers. Rent ceiling is another price control that is aimed at protecting the interest of those who seek rental accommodation. These policy measures are directed to help the target group. Arguments against wage and price controls Wage control such as a minimum wage creates unemployment in the economy by raising the wage rate above the equilibrium level. It reduces the social welfare of those who are now left unemployed. They now attempt to look for a job and are willing to work for a further reduced wage rate, some of them might become petty criminals. Price controls like price ceiling makes a product affordable but they create a shortage and this result in a large number of people who are not able to make a purchase. This also creates a black market for these products. Price floor such as price support programs help the producers of certain commodities but this also increases the deficit of the government. Rent ceiling again creates a shortage and encourages poor quality of rental accommodation. These policy measures are therefore welfare reducing as well.