 Should the government do something about rising prices, wage increases and other disputes in the free market? The government can step in to do a lot of controlling, as far as I'm concerned. So, yeah. Only when there's a genuine case of monopolisation by one company, I think they should intervene and say, you know, this is not right and maybe make it less expensive. I think so, yes, but even government intervention would need to be monitored because I think it depends, obviously, on the government. But yes, I think to a large degree, yes, definitely. Market prices will sometimes end up at a level that's clearly to the advantage of some people, but to the disadvantage of others. Now, when this happens, the government may be asked to intervene in the markets, maybe by imposing a price ceiling if they feel a price is too high and a price floor when a price is too low. A price ceiling is a legal upper limit on the price of a good or service. Once imposed, it becomes illegal for producers to charge a price higher than the ceiling price. A price floor, on the other hand, is an imposed minimum price that may be charged for a product. It becomes illegal to set a price lower than this limit. But what does that mean and why does it happen? Why would they insist on a price higher or lower than the market price? We'll have to take a closer look. There are very compelling and compassionate arguments why there should be a minimum wage, for instance, in our economy. After all, who could think it fair for workers to be paid a starvation wage, a wage that's too low to live on? In 2008, the minimum wage in South Africa for farm and domestic workers was in the region of a thousand round a month. Employers are allowed to pay wages higher than this minimum wage, but it is illegal to pay wages lower than this minimum wage. Economists can't say whether a minimum wage is right or wrong, because that goes beyond just economic considerations and involves political, social and humanitarian issues. What economists can do, however, is work out the likely effect of a minimum wage, which is a price floor, set at a higher level than the market price. Using some of the demand and supply tools we've now been equipped with, we can evaluate the effect of this price intervention in the market. On the one side of the market, we have demand for labour, demand generated by firms, business and industry. The demand curve for labour is downward sloping, indicating that as the price rises, or in this case the wage rises, the quantity of labour demanded falls and vice versa. We'll denote the quantity of labour by the letter N. Now, looking at the supply curve for labour, it's upward sloping, indicating that the higher the wage, obviously the more willing people are to work, and so the higher the quantity of labour supplied. Without any government interference in the labour market, the equilibrium wage, that's the wage where the quantity of labour demanded is equal to the quantity of labour supplied, is established at price, or wage, W.E., and at the quantity of labour supplied, N.E. Now, this equilibrium wage may not necessarily be regarded as a fair or living wage. Due to the population explosion of the last 100 years, there's an excess supply of labour. There are millions of people all over the world who live in poverty, and often have to work for very low wages below what's regarded as a living wage. It is in exactly this type of scenario that government might feel that it's its responsibility to intervene in the market, to prevent employers from exploiting labour, and to protect the income of households, ensuring that they come close to a living wage. Government, through its regulatory powers and the legal system, will enforce a minimum wage, say W.M. Now, W.M. is likely to be higher than the equilibrium wage established by the market itself, that's why the government intervened in the first place. The market is now having to absorb forces beyond our usual demand and supply. And we can see that at a higher wage of W.M., employers cut back on their employment of labour, since it's now more expensive to hire labour. But, on the supply side of the market, the higher wages attract more people to that type of work, and there's an increase in the quantity of labour supplied. This drop in the quantity of labour required by firms, combined with the increase in the number of job seekers motivated by this higher minimum wage, will now lead to an excess supply of labour. In other words, there are suddenly not enough jobs for all the people seeking work. This government intervention, the imposition of the minimum wage, has created more unemployment in the labour market. What the government has achieved with its minimum wage intervention is that those people who can get jobs are now definitely better off in terms of income. But there's a negative effect too, because other people are worse off, because they now have no job and no income. Studies have shown that the negative impacts of minimum wage intervention usually falls most heavily on the least skilled groups, like teenagers, women. An intervention to help the poor can actually end up hurting the very poorest. Rising prices often cause an outcry among consumers, needing to allegations of profiteering, exploitation, collusive behaviour, price fixing. Politicians worry about price rises too, especially if it's for basic commodities like bread or petrol. Policy adjustments need to reinforce macroeconomic stability in the context of a deteriorating international environment and provide a temporary cushion to the domestic economy. Lower inflation in the months ahead should contribute to moderating interest rates of business. Organised labour and community organisations with government has been convened to agree on an appropriate South African response to the current crisis. This initiative is rightly focused on both the immediate response required and on our longer term policy goals. This is the dark side of the free market model. If you look beyond the headlines and investigate further, you'll find strong evidence to suggest that the market cannot be trusted to regulate itself. Remember the words of Mr Smith. The high price of these basic commodities will impact heavily on the country's poorest citizens. There will be a general inflationary effect across the whole economy, creating the possibility of social unrest, strikes and higher wage demands. And if the government is seen to be doing nothing about it, it will lose votes in the next election. The government will feel the public pressure to do something about it, and one of the obvious options is to impose a price ceiling on the product. But this price ceiling comes at a cost as we're seeing this demand and supply analysis. Suppose the supply of petrol decreases due to production problems or a war in the Middle East. This can be represented by a leftward shift of the supply curve, and the price of petrol might rise from seven to ten round per litre. If the government reacts and imposes a price ceiling to keep the price at, say, eight round per litre, a shortage develops in the market. Suppliers produce less, demotivated by this lower selling price, while the quantity supply no longer matches the quantity demanded. At eight round, consumers now demand a quantity of Q2, but suppliers are only willing to supply an amount Q1. This creates an excess demand or shortage of petrol equal to Q2 minus Q1. Now this is really significant. The market is now unable to fulfill its normal rationing function, where those who can't afford a product don't get it. Other ways now have to be found to decide how this limited quantity supply to Q1 is to be divided among consumers demanding the higher quantity, Q2. The inadequate supply of petrol must now be rationed. Now this can be done by a first-come, first-served basis, so those in front of the line will be able to get hold of petrol, and those at the back will either have to go without petrol or else look elsewhere for it. Qs form, times wasted, and some people end up without getting the quantity of petrol they want or no petrol at all. Some informal rationing system might develop whereby suppliers limit the quantity sold to each consumer or by selling to regular consumers only. So make sure you have a friend in the petrol business. Now the government can step in again and issue rationing tickets or coupons. So in order to obtain petrol, you have to have both money and a rationing card and an incentive for corruption is created. So make sure you have a friend in the government business. From experience, we've learned that a price ceiling imposed on a market where producers have legitimate reasons for raising prices will result in some or all of these problems, which eventually outweigh the benefits of keeping the price down. In 2007, the government of Zimbabwe decreed that the prices of all goods and services were to be cut by 50%. Failure to comply with this regulation would lead to imprisonment and the confiscation of goods in question. On the day the government implemented these price cuts, consumers stormed the shops to buy up as much as they could at the new lower prices. In a matter of hours, the shops were emptied. The consumers at Zimbabwe were clearly better economists than the government. They knew that this decrease in the price could only be temporary and would result in a severe shortage very quickly as suppliers couldn't afford to continue production. To explain the persistent shortage that followed, the government claimed it was due to hoarding by greedy producers. They promised to hunt them down and confiscate their goods. Police squads were sent out across the country. But guess what? No goods were found. Suppliers had withdrawn, closing their factories and shops, and halting the importation of goods. There were simply no goods to confiscate. And eventually the government was forced to raise prices again.