Price Floors: Surpluses and Lost Gains from Trade

Price Floors

• Sometimes the government intervenes by keeping the price above market levels   * Ex: minimum wage
• Price floor: minimum price allowed by law   * Prices can’t legally go below the floor
• Debate on minimum wage:   * An increase in the minimum wage will lift many individuals out of poverty and have little impact on unemployment   * An increase in the minimum wage will result in lots of unemployment and have little impact on poverty
• Create 4 important effects:

     1. Surpluses   2. Lost gains from trade (deadweight loss)   3. Wasteful increases in quality   4. A misallocation of resources

Surpluses

• $Surplus:$ the quantity of something supplied exceeds the quantity demanded
• Minimum wage creates unemployment because at a high enough wage, none of us would be worth employing   * It will decrease employment among low-skilled workers     * The more employers have to pay for low skilled workers, the fewer low-skilled workers they will hire     * Ex: young people are more likely to be made unemployed by minimum wage because they lack substantial skills

Lost Gains From Trade (Deadweight Loss)

• If employers and workers could bargain freely, the wage would fall and the quantity of labor would traded would increase to the level of market employment
• There are substitutes for minimum wage workers   * Higher minimum wages increase incentive to move production to other places where wages are lower   * Many minimum wage jobs are service jobs that can’t be moved abroad but firms can substitute capital (in form of machines) for labor

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