Planning Local Economic Development And Essay Publications.

Analysis of governmental policy of price flooring and price ceiling

Discuss about the Planning Local Economic Development and Publications.

Economies around the world now a day are indulging with each other through international trade in order to achieve sustainable growth and to gain mutual prosperity in their respective countries. During last three decades a new idea termed as free trade has been germinated, which argues in favour of barrier less international trade between countries in order to provide higher level of growth in the trade participating economies (Rodwin and Sazanami 2017). However, often government use policies like price floor or price ceiling in order to restrict the market failure. There have been plenty of researches on the efficiency frontier of the price ceiling and price flooring; however previous researches provide diversified view regarding these policies. Some researches argue these policies are essential in order to restrict the market failure, whereas some researches highlights that under price ceiling and price flooring, resources are not allocated optimally (Bond and Goldstein 2015). In a real life scenario, when it comes to Australia, then minimum labour wage can be considered as the practical example of the price ceiling. Now, this report is aimed to discuss these aforementioned government’s market intervention polices under an open market scenario in order to trace their efficiency. In addition to this, the report will discuss whether government of Australia should abolish the minimum wage policy or keep it as it is as a protectionism policy from the government.

Trade participating nations often use the price flooring and price ceiling practice in order to blockade the market from breaking down. According to the Balassa (2016), government uses these policies, when there are discrepancies in the price level in the importable or exportable. For instance, if a good is sold at lower price compared to its substitute, then the government set a price floor with a higher price compared to existing equilibrium market price. From figure 1 it can be seen that the initial equilibrium price is P0 and the market demand it Q0, which is assumed to be lower than the international market price. Under this situation government will set a higher price, which will enhance influence the producers to produce more leading to excess supply. Domestic market now can sell the excess produce at lower price compared to the international price, leading to fall the international price too; thus saves the market.

on the other hand if a certain good or service is being sold at higher price compare to the prevailing domestic market price, then government uses the price ceiling. From figure 2, it can be seen that if government sets price ceiling at P_max, which is lower than the prevailing market price, then it will lead to excess demand of the said goods and services. With higher demand price it will enhance the consumer surplus thus aids the welfare of the society (McCombie and Thirlwall 2016).

Bright side of government’s interventionist policy

Therefore, it can be seen that government intervention can effectively blocks the market failure; however, it is also true that it can lead to dead weight loss (Perkis et al. 2016). In addition to this, with higher market intervention, it can affects the labour market, thus generating demand-supply gap it can also results in inefficiency in resource allocation (Baumol and Blinder 2015).

There have been various researches that argue in favour of the government’s market interventionist policy. According to them, bright side of government’s interventionist policy is as follows (Nepal and Jamasb 2015):

• It enables the small firms to become competitive
• Consumer surplus can get enhanced
• Scope of negative externality get reduced
• Restricts the firms to have monopoly power

Various researches have highlighted the negative impact of the government’s interventionist policy. Some of the dark side of market interventionist policies by the government are as follows (Smith and Meier 2016):

• It leads to reduction in scope of job employment for the unskilled and semi skilled labours.
• Bureaucracy in the market gets highly enhanced in presence of government’s intervention in the market.
• Restricts the growth of small firms, due to lack of incentive for the producer to hire labour at higher cost.

Since 2005, Australian government has introduced an ambitious project known as minimum wage policy in order to reduce the disparity in wage level of different region Gasper et al. (2016). Under the Australian Fair Pay Commission, government of Australia tried to implement minimum wage policy, which in turn is aimed to reduce the differentiation in the price level in different regions of the country (Buchanan and Oliver 2016). Since its implication, there has been various researches regarding this topic, thus the effect of minimum wage rate on the economy is well documented. According to the Iyengr et al. (2016), it has been found that through minimum wage policy government tried to bring in parity in the labour wage in different region of the country, however, it has failed to provide stimuli to the labour force. Lack of incentive for the producer to employ labour at higher cost has reduced the labour demand leading to fall in the overall employment level. according to the unemployment data of Australia, it can be seen that, though there were some amount of reduction in the unemployment level since 2005 to 2008, however, since then it has been rising, highlighting that the economy has lost some amount of employment.

On the other hand, unified minimum wage around the country has restricted the growth of the firm in northern territory of Australia (Mavromaras et al. 2015). Due to prevailing backwardness in the northern territories of the country has shortened the labour employment in the region, because during last few years’ subsequent rises in the minimum wage level is beyond the manageable scope of these firms. Moreover, rise in the wage level has reduced the labour demand leading to fall in the labour supply, which in turn can lead the economy to the destruction (Hirsch et al. 2015). now, it has been observed that only the skilled labour are getting employed, where as unskilled or semi skilled, which is accounted for 85% of total labour force in Australia are not having any job due to rise in wage rate (Evans 2016). on the other hand it has been observed that, rise in demand in the skilled labour due to minimum wage policy has enhanced the country’s total skilled workforce leading to better prospect for future of the economy (Leigh and Blakely 2016). Australia has the highest minimum wage compared to the other countries that have minimum wage policy. This excessive wage rate has caused demand-supply gap in the Australian labour market causing loss in the employment and the surplus.

Dark side of market interventionist policy by government

Above analysis has highlighted that there has both the bright and dark side of the protectionism policy from government. According to Weimer and Vining (2017), through comparative analysis of the price government’s protectionism policy under an open market scenario it has been found that government aims to provide stimuli with their market interventionist policy; however, through improper resource allocation it fails to do so. Considering the case of the Australian government it can be seen that unified minimum wage rate has hampered the labour employment rather than enhancing it (Pradella 2015). On the other hand, it is wise to acknowledge that, government’s intervention in the labour market has aided it to have higher amount of skilled labour with which Australia is now facing tech metal mining boom. Considering the circumstances, where a government intervention in market has both the positive and negative effect, being the economic policy advisor to the government following are the recommendation to gauge the situation:

• Government need to perform market survey effectively in order to assess the present situation and apply those interventionist policy where necessary, rather making them general.
• Price ceiling and price flooring can hamper the labour market of a country rather than stimulating it. Optimal way to gauge this is to introduce differentiated price depending upon the region.
• Government need to apply the protectionism policy depending upon the market scenario while considering the effect of protection on bilateral trade and country’s budget.
• Liberalisation of the minimum wage policy is highly required in order to provide ample scope to the small firm to mature. Otherwise, protectionism of the government will bring in oligopoly market that will lead to price curtailing reducing the consumer surplus of the buyers.
• Minimum wage policy of the Australian government is general in nature, which are same all around the country. Thus government, need to set differentiate price depending upon the region in order to bring in parity in the market.
• Minimum wage policy of Australian government has reduced the labour demand in the market for quite a long time. Thus to provide stimuli to the market, government need to bring in vocational training programs or skill development workshops to produce higher amount of skilled labour.

Conclusion:

The report has tried to assess the efficiency and the validity of government’s interventionist policies in order to protect the market from failure under the open market scenario considering the economic theories and previous researches. Through the analysis it has been found that, government’s intervention in the market economy is highly essential in order to bring in stability in the market, however, it is also true that sometimes it leads to market inefficiencies due to improper allocation of the resources. In addition to this, policies like price ceiling and price flooring bring in the deadweight loss to all the parties indulged into the business. Though it enhances government’s revenue generation, yet it reduces consumer as well producer surplus leading to poor market condition than open economy. In addition to this, the report has found that, when it comes to Australian minimum wage law, then it need to be reformed depending upon the requirement of various zones. Diversified wage policy can provide better effect on the labour market and thus aid the government to achieve what it desires to achieve. To conclude it can be said that efficiency of price ceiling and price flooring is subjective and whether it is valid or not it depends upon the market condition that the government needs to trace through surveys.

Reference:

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