Good Government Price Control Case Study Example

Question 1

Laws setting minimum wage and maximum rent are established to guarantee the citizens a minimum standard of living by preventing exploitation by the landlords and employees (Gorman, 2015). Low wages result in reduced standards of living of the employees and higher rents above the maximum increase cost of living thus reducing the standards of living.
There are no laws setting maximum wages and minimum rents to prevent unfavorable market disequilibrium. A maximum rent will reduce the supply of workers if they expect a higher wage than the maximum. This will cause shortages of labor as demand will rise while supply falls (Gorman, 2015). There are no laws for minimum rent to ensure that the cost of living can fall to as low as possible. A higher minimum rent will increase the cost of living.

Question 2

Rent controls reduce the supply of houses and increase the demand for houses thus causing shortages (Block, 2015). It limits the return to landlords thus making them shift their funds to other sectors and build fewer houses.
Minimum wage laws cause surpluses of labor. They increase the supply of labor as workers are guaranteed of a given standard of living. On the other hand, minimum wage laws reduce employment as they increase the cost of production to firms.

Question 3

Workers: the advantage is that they guarantee workers a given amount of pay thus securing a particular standard of living (Gorman, 2015). The laws also prevent exploitation of workers by employers. The disadvantage is that they reduce employment especially if the minimum wage is high.
Employers: Employers benefit from increased labor supply. The disadvantage is that they increase the cost of labor thus reducing employers’ profits.
Consumers: Consumers lose since firms increase the prices of commodities to offset the high cost of labor caused by minimum wages.
Minimum wage cannot be set at a low level. If it is set below the equilibrium level, it will reduce the demand for labor and increase the supply of labor. Therefore, a high minimum wage will lead to unemployment.
Maximum rent cannot be set a lower level as that will reduce the profits of investors. It will cause a decline in the supply of houses since investors will shift their capital other profitable sectors (Block, 2015). It will also increase the demand thus resulting in shortages.

References

Block, W. (2015). Rent Control: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Econlib.org. Retrieved 14 April 2015, from http://www.econlib.org/library/Enc/RentControl.html
Gorman, L. (2015). Minimum Wages: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Econlib.org. Retrieved 14 April 2015, from http://www.econlib.org/library/Enc/MinimumWages.html