On the Negative Consequences of Minimum Prices

AT my previous column I have explained the five negative effects of price ceilings—the five negative effects, that is, government intervention to lower the money prices consumers pay and sellers receive for certain goods and services. However, governments also sometimes try to raise prices. up. When intervention is aimed at increase prices by prohibiting the collection of money prices below a certain minimumintervention is called price floor.

For various reasons, floor prices are actually less common than price ceilings, but they do exist. To date, the most common minimum price level is the government-imposed minimum wage.

Not surprisingly, floor prices, like ceilings, have negative consequences. But before detailing these shortcomings, it is useful to distinguish true floor prices from other means used by governments to artificially fix the prices of certain commodities. The most common non-minimum means used by governments to artificially keep the prices of certain goods high is the obligation of the government to purchase enough of a certain good so that the price of that good does not fall below a certain minimum.

Suppose the government is committed to keeping the price of wheat below $10 a bushel. Wheat farmers are economically sophisticated. They understand that a true floor price—a simple ban on selling below the floor price—will reduce the amount of wheat buyers are willing to buy. While this result of selling fewer bushels of wheat at a higher price per bushel may raise the profits of wheat farmers above what they would have been without government intervention, such higher profits are not guaranteed. If the floor price is set too high, the negative impact on farmers of selling fewer bushels will outweigh the positive impact of a higher price per bushel that is Sales.

The best way for farmers to avoid this possibility is not to prohibit the government from selling below a certain price, but instead create their own demand for wheat, which will be added to the demand of private buyers. If the government is committed to buying enough wheat to keep the market price of wheat from falling below the desired minimum, wheat farmers get a higher price. as well as will not suffer from reduced sales.

This state intervention has its negative consequences, which – do not be surprised! – outweigh the corresponding benefits to wheat farmers. But this intervention does not provide a true price floor.

The real floor price, I repeat, is a simple government prohibition on selling and buying below some government-imposed minimum money price. While many of the negative effects of price bottoms are similar to those of price tops, there is one important difference: in most but not all marketsseparates the two interventions.

Let us assume that the government sets a real minimum price in the market for pickles. The government makes it illegal to buy and sell pickles at prices below, say, $10 a pound (assuming this price is above the market price that would have prevailed in the absence of a floor price).

The first and most obvious effect of this floor price is that the quantity of pickles that consumers are willing to buy will fall; the quantity demanded by consumers will be lower than it would be without the minimum price. If pickle producers are economically naive, this floor price will create a physical surplus of pickles as producers, attracted by the higher price, will increase pickle production. But even the most naive pickle growers soon learn that consumers are willing to buy at high floor prices not only for less pickles than producers are willing to produce. and sell at this high floor price, but even less than what consumers were willing to buy at prices below the floor.

Finding they can’t sell all the products they make ready in order to sell at the lowest price, pickle producers cut production. They produce no more pickles than consumers are willing to buy at a high price. Thus, while price ceilings always create shortages, price floors do not always create physical surpluses.

However, since the minimum prices to always reduce the volumes buyers are willing to buy while increasing sellers’ sales. readiness for production and sale, minimum prices create a second negative consequence, namely the need for some means to determine which sellers will be among the lucky ones to sell at a higher price, and which sellers will not be able to take advantage of a higher price. by actually selling units of output at that price.

This determination can be made by luck or by accident. Perhaps only those sellers who meet customers early will be able to sell, while sellers who enter the market too late will no longer find buyers.

But luck or chance is unlikely to last long. In an effort to sell at a high floor price, sellers will compete for buyers in ways other than lowering prices. Thus, the third negative consequence of the minimum price is that qualitative commodity prices are rising. Pickle manufacturers can attach “free” discount coupons for crackers, deli meats, or beer to every can they sell. These manufacturers can work hard to make their pickles taste even better. This non-price competition for consumer protection is the inevitable result of price flooring.

Unlike quality cuts caused by minimum prices, incentive to quality improvements caused by price ceilings may seem to be a positive consequence rather than a negative one as I have described. But this is a minus compared to the situation in which there would be no price floor.

This is true, the that consumers are not allowed to buy pickles at any price below $10 a pound, they like their pickles to be even tastier or sold with discount coupons. But even more, consumers would like to pay a lower price for a lower quality product. If there were no floor price, consumers would find in the course of their spending that higher quality is not worth the higher price. However, since lower prices are illegal, i.e. because consumers must pay a higher price if they want pickles – consumers settle for second best by paying this higher price for pickles. above-quality product.

In short, floor prices force consumers to buy too few goods, but too many good ones.

The fourth effect of a floor price is that it reduces the amount of goods or services that consumers actually purchase. The direct reason for this effect is that consumers are unwilling to buy as many units at a high floor price as they would be willing to buy at the lower price that would have been prevailing in the absence of a floor price.

I mentioned above that floor prices in some markets have a slightly different effect than in other markets. There are some markets – as opposed to pickles (or plywood or propane or pork or whatever) – where prices are lower to Create loading surplus. This unfortunate consequence holds true for labor markets as well.

BUT minimal salary prevents workers from competing for employment by offering to work for any cash wage below the state minimum. As a result, many low-skilled workers either lose their jobs or never find them. But, unlike pickles, the labor of these workers (or their desire to work) does not cease to be “produced” when these workers cannot find buyers for their labor services. Flesh and blood people continue to exist and desire employment, even if they become unemployed due to minimum wage legislation.

So, in labor markets, we are faced with the fifth negative consequence of price floors: price floors in labor markets. increase over time, the supply of low-skilled labor. Low-skilled workers who take jobs with minimum wages receive not only current income, but also work experience. Low-skilled workers who are denied employment at the minimum wage lose not only their current income, but also the opportunity to gain work experience. As a result, low-skilled workers who are unemployed today because of the minimum wage are tomorrow left in the pool of low-skilled labor. And so, because the minimum wage artificially increases the supply – the supply – of low-skilled workers over time, this legislation also reduces wages for low-skilled workers, which would prevail if the minimum wage were abolished.

As with the price ceiling, if more people realize the full economic implications of price floors, public support for a particularly pernicious piece of legislation called the “minimum wage” will plummet. And this support for the minimum wage will fall sharply, especially among low-skilled workers, for it is they who suffer the most from this intervention.

Donald J. Boudreau

Donald J. Boudreau

Donald J. Boudreau is Senior Fellow at the American Institute for Economic Research and the F.A. Hayek Advanced Philosophy, Politics, and Economics Program at the Mercatus Center at George Mason University; board member of Mercatus Center; and professor of economics and former chair of the economics department at George Mason University. He is the author of books Essential Hayek, Globalization, Hypocrites and idiotsand his articles appear in publications such as Wall Street Journal, New York Times, US News and World Report as well as numerous scientific journals. He has a blog called Cafe Hayek and a regular column on economics for Pittsburgh Tribune Review. Boudreau received his Ph.D. in economics from Auburn University and his law degree from the University of Virginia.

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