Question

With an aid of diagrams differentiate between a price ceiling and price floor as government intervention measures to market failure and indicate the short term benefits and longer term negative effects on each.
Explain which one of the above market control measures is applicable in the Labour market and justify why it is important to consider the effects of such action.

Answer 1

Price ceiling and price floor are two types of price controls. Price ceiling is the allowable highest price for a particular food or service while price floor is the allowable lowest price. The government determines the price for goods and services using either of the two price controls only when it is not satisfied with the market price failure.

One short term benefit of price ceiling is imposing inexpensive goods or services especially to low-income workers while for price floor is determining a minimum value for wage to ensure minimum standard status of living. Thus, price floor is more applicable in the labor market because it creates a standardized minimum wage to protect workers’ rights. It is important to consider such action to improve the financial status of the workers as well.

The longterm disadvantage of price ceiling is it results to high demand and minimal supply which will lead to huge shortage, whereas for price floor is increasing unemployment rate to offset expensive cost of labor and benefits of employees.

For more detailed discussion of the answer, you can refer to the attached file.

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