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Economics IGCSEPDF 46
118 pagesrevision 46932
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Maximum price or price ceiling is set to control an increasing tendency ofprice. It is usually
set on rent (this is called rent control), to ensure that low-income tenants canafford to rent
homes. But as a result of the lower rent, landlord will stop renting more homes, causing supply
to contract, as shown in the diagram to the left. At the same time, lower rentwill increase the
• Laws and regulations can increase production costs and reduce production in the economy.
• Public sector organizations will still be inefficient and will produce low quality goods and
services.
The specific ways in which the government, in a mixed economic system, can correct market
failures of the market:
Legislation and regulation – the government can make laws that regulate market activity, for
example, prohibit smoking in public (which would cause a negative externality). One important kind
of legislation the govt. can undertake price controls – setting a minimum price or maximum price
on goods.
Minimum price or price floor is set to control a decreasing tendency of price. The minimum
wage laws in many countries are an example of minimum price. The government sets the
minimum wage above the existing market equilibrium wage, to ensure that all workers get a
basic minimum wage to sustain them. But even as low-income workers now get better wages,
the higher wage will cause the demand for labour to contract, as shown in the diagram to the
left. There will also be a higher supply of labour (workers who want work) because of higher
wages. A reduced demand and increased supply will cause excess supply of labour i.e.,
unemployment.