Price controls: ceilings and floors

In November 2021, Hungary’s government capped the price of petrol and diesel. A year later, the cap sat far below the market price. People were buying about a quarter more fuel than a year before. Foreign suppliers had cut their shipments, and a refinery run by the oil group MOL was under repair. By early December 2022, MOL said about a quarter of its filling stations had run dry. Long queues formed at the pumps. On 6 December the government scrapped the cap. Petrol then cost about a third more.

A ceiling below equilibrium makes buyers want more and sellers offer less. At a ceiling of 30 dollars, buyers want 35 units but sellers offer only 20. Sellers are the short side, so only 20 are sold: no law makes them sell more. Buyers who get one of the 20 gain, because they pay less. Buyers who used to buy at 40 dollars but now go without lose out, and so do sellers.

With the price stuck, the shortage shows up in other ways:

• Queues. Buyers pay with their time, like the Hungarian drivers.
• Black markets. Some buyers and sellers trade illegally above the ceiling.
• Falling quality. A landlord with a capped rent may skip repairs.

The deadweight loss is the triangle between the curves, from the quantity still sold up to equilibrium. The shortage is different: it counts units buyers want but can’t get.

A price floor is the mirror image of a ceiling. Set above equilibrium, it holds the price up, so sellers offer more and buyers want less. The leftover is a surplus: goods nobody buys (not the gains called consumer and producer surplus).

The best-known floor is a minimum wage. Workers sell labour and employers buy it. So a surplus of labour is unemployment: people who want a job at that wage but can’t get one.

At 14 dollars, 20,000 people want jobs but employers hire only 12,000. Those 12,000 gain, because they earn more. But 4,000 jobs have gone, and employers pay more. Unemployment (8,000) is bigger than the jobs lost, because the higher wage draws new people into looking for work.

The simple model predicts that a minimum wage above equilibrium costs jobs, but the evidence is mixed. Germany brought in its first national minimum wage in January 2015, when about 15% of workers earned less than it. A 2022 study found that wages rose but overall employment did not fall. Another found that small part-time “mini-jobs” fell by about 180,000. A 2019 study of 138 rises in US state minimum wages found that low-paid jobs barely changed in number. But Seattle raised its minimum to as much as 13 dollars an hour in 2016. A 2022 study found that employers there cut low-paid workers’ hours and hired fewer newcomers. Experienced workers still took home more pay, but people with no work experience lost out.

One likely reason for small effects: where a few employers dominate a town, they can set pay below what a worker adds to the business. A moderate minimum wage can then raise pay without cutting jobs. Economists still argue about how high a minimum can go before it costs jobs. So when you evaluate a minimum wage, weigh the model’s prediction against what studies of similar rises found.