A Level Economics 64: Maximum and Minimum Price

Maximum and minimum prices are government-imposed price controls (regulations) aimed at influencing the market price of goods and services. These controls are typically implemented to achieve specific economic or social objectives. The rationale behind maximum and minimum prices can vary, but their primary purposes are to protect consumers, ensure fair wages for workers, stabilize markets, or control inflation.

Maximum Prices: A maximum price, also known as a price ceiling, is the highest price that can be legally charged for a specific good or service. The government sets the maximum price below the market equilibrium price to protect consumers from excessively high prices. The goal of a maximum price is to make essential goods more affordable for consumers, especially during times of crises or shortages.

Example of Maximum Price: During a severe drought, the government may set a maximum price on bottled water to prevent sellers from charging exorbitant prices due to increased demand. By capping the price, the government ensures that consumers can access water at a reasonable cost during the crisis.

Minimum Prices: A minimum price, also known as a price floor, is the lowest price that can be legally charged for a good or service. The government sets the minimum price above the market equilibrium price to provide producers with a fair income or to ensure minimum wages for workers. The objective of a minimum price is to support producers and workers in industries where they may face challenges in earning a living wage or fair returns on their products.

Example of Minimum Price: In the agricultural sector, the government may set a minimum price for certain crops to support farmers and stabilize their incomes. If the market price for a crop falls below the minimum price, the government may step in to purchase the surplus at the set minimum price, ensuring that farmers receive a fair income.

Working of Maximum and Minimum Prices:

• Maximum Price: When a maximum price is set below the market equilibrium price, it creates a situation of excess demand or shortage. At the maximum price, consumers are willing to buy more of the good than producers are willing to supply. This can lead to long queues, black markets, and reduced availability of the product.

• Minimum Price: When a minimum price is set above the market equilibrium price, it creates a situation of excess supply or surplus. At the minimum price, producers are willing to supply more of the good than consumers are willing to buy. This can lead to unsold inventories, wastage, and potential inefficiencies in the market.

Example of Maximum Price in Action: During a housing crisis, the government may set a maximum rent price for apartments to protect tenants from unaffordable rent increases. While this measure benefits renters, it may discourage landlords from maintaining or offering additional rental properties due to reduced profit margins.

Example of Minimum Price in Action: In the labor market, the government may set a minimum wage to ensure that workers are paid a fair wage. While this measure benefits workers, it may lead some employers to reduce hiring or cut back on labor-intensive activities to offset increased labor costs.

In conclusion, maximum and minimum prices are government interventions in the market to achieve specific economic or social objectives. Maximum prices are aimed at protecting consumers from high prices, while minimum prices are intended to support producers and workers. While these price controls can have positive effects, they may also lead to unintended consequences and distortions in the market. The success of such interventions depends on the government's ability to strike a balance between achieving the desired objectives and avoiding potential market disruptions.

Only a maximum wage can end the great corporate pay robbery

Corporate wealth is being siphoned off by a kleptocratic class that has neither earned nor generated it

• 
• • George Monbiot
  • guardian.co.uk, Monday 23 January 2012 18.58 GMT
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The business secretary, Vince Cable. Photograph: Martin Argles for the Guardian

 

The successful bank robber no longer covers his face and leaps over the counter with a sawn-off shotgun. He arrives in a chauffeur-driven car, glides into the lift then saunters into an office at the top of the building. No one stops him. No one, even when the scale of the heist is revealed, issues a warrant for his arrest. The modern robber obtains prior approval from the institution he is fleecing.
The income of corporate executives, which the business secretary Vince Cable has just failed to address, is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth that was once spread more evenly among the staff of a company, or distributed as lower prices or higher taxes, is now siphoned off by people who have neither earned nor generated it.

Over the past 10 years, chief executives' pay has risen nine times faster than that of the median earner. Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1,000 times the national median wage. The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007.

These rewards bear no relationship to risk. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers. Even if they lose their jobs and never work again, they will have invested so much and secured such generous pensions and severance packages that they'll live in luxury for the rest of their lives. The risks are carried by other people.

The problem of executive pay is characterised by Cable and many others as a gap between reward and performance. But it runs deeper than that, for three reasons. As the writer Dan Pink has shown, it's not just that there is currently no visible link between performance and pay; but high pay actually reduces performance. Material rewards incentivise simple mechanistic jobs: working on an assembly line, for example. But they lead to the poorer execution of tasks which require problem-solving and cognitive skills. As studies for the US Federal Reserve and other such bolsheviks show, cash incentives narrow people's focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance.

Even the 0.1% concede that money is not what drives them. Bernie Ecclestone says: "I doubt if any successful business person works for money … money is a by-product of success. It's not the main aim." Jeroen van der Veer, formerly the chief executive of Shell, recalls, "if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse". High pay is both counterproductive and unnecessary.

The second reason is that, as the psychologist Daniel Kahneman has shown, performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion. A link between pay and results is a reward for blind luck.
Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment. They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company.

Cable has announced four main policies: more transparency, a requirement that companies should "report" on boardroom diversity, a mechanism for clawing back pay settlements not justified by the company's performance, and granting shareholders binding powers to block excessive rewards. They are likely to be almost useless – or worse. Pay transparency, while of general interest, can create the perverse result that executives discover how much their rivals are getting, and use the information to demand more. The clawback mechanism will be inserted into the corporate governance code. This is voluntary, and its existing provisions are widely ignored.

Shareholder power is likely to be illusory. As Prem Sikka has shown, the proportion of stock owned by individuals fell from 47% in 1969 to 10% in 2008, while the percentage in foreign hands has risen from 7% to 42%. Why should oil sheikhs care about social justice in the UK? And most traders hold shares too briefly to take an interest in the inner workings of a company. As Rob Taylor, formerly the chief executive of Kleinwort Benson, points out, if shareholders don't like the way a company is run, they don't hang around to change it; they sell up and move on.

Labour's policies seem designed to sound tough but change little. Like Cable, its spokesman Chuka Umunna talks of transparency and simplicity (which are both worthy aims) but not of holding down pay. Labour has based its policy on the findings of the High Pay Commission, which have been widely hailed as revolutionary. I've read the commission's final report, and can find no justification for this description. Its recommendations are, to be frank, pathetic. With the possible exception of employee representation on pay committees, the 12 measures it proposes are likely to make only a marginal difference. Nowhere does it suggest anything resembling the obvious means of capping executive pay: namely, er, capping executive pay.

So what should be done? The UK government imposes a minimum wage, and even the neoliberal coalition appears to accept that this is a necessary intervention in the market. So why should it not impose a maximum wage?

I'm not talking about ratios or relative earnings. Various bodies have proposed that there should be a fixed ratio of the top earnings within a company to either the median or lowest salaries. But as a report on this issue by the New Economics Foundation shows, the first measurement quickly becomes complex and opaque, the second creates an incentive to contract out the lowest paid work. I'm talking about an absolute maximum, applied nationwide.

Let's say £500,000 a year, a figure that includes bonuses, share options, pensions and benefits. It will rise with inflation, but no faster than that. If you want to make more, you can invest in a risky venture of your own or someone else's. If you want to make more money as a salaried worker – in other words while other people carry the risks – you can go abroad, and good riddance to you. Another country, incautious enough to set no cap, can deal with the consequences of your destructive greed.
The feeble measures proposed by the government will do nothing to prevent the great pay robbery. If Vince Cable intended to limit executive pay, he would limit it. But he knows who his masters are, and the policies he has announced are intended to create only a semblance of action.