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17

ilibriuvi

cc at the shortage price, the quantity d exceeds the available supply, station owners ;ndves to cut their own costs bv rcducuig qual-all, since they can sell al! die gas ihev Irave at e price, they can cut costs uithom cmiing by reducing qualit)-. For this reason cus-fmd decreased numbers of auendants on ejiminadon of windshield washing, a reduc-CStroom cleanliness, and sometimes a cut hi :i orpurit). Station owners wi!] also lia\e to tum this non-price competition to their by tying goods not subject to the price ceil-liinc. For instance those ordering tune-ups ifele to buy gas without waiting in line.

washes ma) raise dieir prices and refuse but car wash customers. Outlawing such ly, of course, suppress them, but that will icl competition into some other mode, ippearance of scarcit) can slop competi-

Seraints should be noticed about much of ce.competition. First, much of it is a pure *i>ss: the increased transactions costs expe-lose waiting in line to buy gas are not benefit by anyone else. Second, it is far lat the poor are any better off under non-mg than under price rationing. Those r with restricted mobilit) or who work hours may well find that they cannot price, rather than all they desire at the ice. One group that is clearlv better off le non-price allocation scheme are the rats who administer it; not only prestige, but perhaps their employ-dependent upon continued nonmarket e good. The interests of this group and »nstituencies they often . . such as lipecial entidements to bu\ gas "in the jest," may well explain the governments such schemes.

:t.ili

i>n

; price ceilings represent the maximum flowed, price floors repie.sem die mini-lowed. The minimum wage represents ofa price floor. Referring to Figure IX he market clearing wage rate is W. die the price of a maii-miit of labor ser-« a man-hour, week, or month. At this rkcrs are hired and no unemployment one who wants work at the prevailing

wage of W can find a job. But suppo.se that Congress decides its "unfair" for people to have to work at such "inadequate" wages, therefore setting a higher minimum wage equal to W9. Since W-i exceeds the market clearing wage, a surplus or excess supply of labor equal to N5 - N(3 will exist. (Verif) that nothing would happen if the legal minimum were below: the market clearing wage.) A surplus of lalor means unemployment; some people who are able and willing to work will be unable to find employment at the prevailing wage of W2. Such people may be left utterly destitute. Again note that this unemployment is caused entireh by the minimum wage; in the absence of this price floor, competition among workers would draw the wage down until the excess supply of labor is wiped out.

Not only does the minimum wage cause unemployment, it also reduces the amount of employment. If the government had not prevented the market from clearing, Np workers would have been employed. Because of the minimum wage, however, employers will now be willing to hire onh Nj workers. In other words, the minimum wage reduces the amount of workers which employers are willing to hire. Since no one can work unless he is first hired, the number actually employed must fall from Ng to N(j. Similarly, any other type of price floor reduces the amount actually traded; in this respect price floors and ceilings are alike in their effects.

As always, suppressing price competition rebounds with increased non-price competition. Since employershave more applicants than jobs at the minimum wage, they will tend to discriminate in favor of the ones drey hke the best and against those less popular. Those hired may be the most responsible, or the

Fig. IX The Impact ot the Minimum Wage

Wage Rate

\ Unemployment >

i\ / t \ / 1 1 V / 1

I 1

1 1 1 1 1 1 1 1 1

Man Hours/Day



"ml

most experienced, or the sexiest, or the most quiet, or the children of friends, or any number of other possibilides. h is extremely unlikely that the favored group will be the poor, especially the minority poor, hi fact, its hard to think of a more anti-black program than the minimum wage.

But that is not the end of the story. Those fortunate enough to be employed at the higher minimum wage are not necessarily better off. Remember that an employer attracts workers by offering a package of wage and working condition inducements. But providing pleasant working condidons represents a cost to employers. Since at the higher minimum wage, employers have more applicants than jobs, they can reduce costs by cutting working condidon ameniucs and sdll hire all the workers desired. Consequently, those who remain employed at the higher minimum wage may uldmately fmd their place of work hotter in the summer and colder in the winter, not to mendon dirder all year round. In addidon the work flow may increase and the boss become less willing to tolerate tardiness, long coffee breaks, pregnancy, use of the phone or mail for personal matters, and any other number of such things. The company may likewise become less cooperative in allowing vacations, sick pay, and company sponsored discounts and recreational activities. Economics cannot say which amenities will be cut; that depends on circumstances which vary from firm to firm. Economics can say, however, that some amenities will assuredly be cut, particularly in firms feeling strong price pressures from competitors; after all, firms with needlessly high costs find it tough to meet price compedtion. Consequently, only those workers who prefer a package of higher wages and inferior working conditions and who are fortunate enough to be employed will be truly better off under a minimum wage. Those who would prefer to exchange higher wages for a more pleasant environment will be worse off. Of course, those unemployed at the minimum wage are also worse off.

One group which may be better off are skilled workers - often union members receiving wages far above the legal minimum. Although high wage workers are not directly affected by the minimum wage, they are affected by the overall supply of skilled workers, many of whom learn their skills through on-the-job training. But for the same reason that the minimum wage reduces the incentive to maintain pleasant working conditions, it also reduces the incentive to attract workers with indiicemeius of on-ihejob training. After all, at the minimum wage, employers have

more applicants than jobs, so that costly training p,, grams represent a wa.ste of money Therefore, to ih,. extent that cuts in on-the-job training reduce the oxer, all supply of skilled workers, unionisLs who are already skilled receive higher wages. Besides, unskilled lalx)r can be a substitute for union labor; the highei iJic price of this substitute, the greater the demand foj-union labor.

Given the apparent folly of minimum wagf laws, why have so many Congresses supported them? Consider the incentives of congressmen. The good effects of minimum wage legislation are very visi and tirerefore likely to please the voters. The serioi bad effects are far less visible. Because it is costlv the voters to understand the important harmful effe of minimum wage laws, few do so. This means diat vol ers may reward their congressman for doing the wroi; tiling. Financial and other support from unions w perhaps increase these inducements. Moreover, bu nessmen geared for production with skilled workcj may seize upon the minimum wage as a means of bling competition from potential competitors usii low paid unskilled workers. To that extent, the)-have incentives to lobby for minimum wage legislad

TICKET SCALPING

Ticket scalpers vie with ax murderers for publics affection. Everybody knows that scalpers pete with the public by buying up tickets at low prii for later resale to the public at higher pric Therefore, banning scalping would consequc mean that we could all go to concerts and aihl events at reduced cost, at least as most people see] This false conclusion seems tempting because it price competition normally constitutes an iiisigr cant part of our overall competition for goods, example, we know we can buy any groceries we lik the local market widioui appearing in line at .:00 a, making the owner especially like us, or buying ot items we dont much want In other words, these other forms of non-price competition are insignifi enough to lie habitually ignored. People conseqi ly incorrectly ignore them when they consider the sequences of ticket scalping.

hi Figure X we display the market .supply demand to die recent B-52s" concert at the Barbara Count) Bowl. We denote the capacit)- of Bowl as Or , where die subscript "c" denotes cap* The concert promoters stand willing to sell ticke all comers at S5.00 per ticket out to the capacit) Bowl, Qj,. If the demand curve should appear as



the concert will not sell out and - Qd tickets will remain unsold. Clearly, a scalper cannot funcdon in such a market.

On the other hand, let the demand rise to Dg in Figure XI, and an excess demand for dckets in the toount of Qd - Qc will arise. While the promoters may have eschewed price competidon to some extent by underpricing the dckets (perhaps because unsold seats look bad), this does not spare the demanders compeddon. What it does do is change the nature of competition to an increasingly non-price basis. If the dckets are priced at $5.00, to attain a seat you not only must outbid everyone offering less than $5.00, a form "ofprice competidon, but you must also buy your dckets early, a form of non-price compedtion absent at market clearing prices. For example, perhaps you mtist wail in line in the wee hours of the morning before the tickets go on sale. The lower the value of your time in alternadve uses, such as workhig for pay, the greater your advantage in non-price competition by vvaiting in line for seats. Consequently low wage T people stand to gain by this form of non-price compeddon. That is why the lines for Jurassic Park a few days after its release had a higher percetuage of teenagers, a generally low wage group, than did later lines, e. Similarly, liighb organized people who plan everything well in advance may also excel at this r\pe of non-price competidon.

Scalpers likewise stand to gain by the excess demand. In Figure XI they can bu\* at $5.00 per seat and resell at S7.00, liquidating the excess demand and causing die market to clear. To that extent, they change the nature of competition from a non-price to a price basis. Since some people are better than oth-

ers at price compeddon, there will be gainers and losers under scalping. People whose dme is valuable will tend to gain along with those who plan to attend at the last minute. Ironically, many of those who gain will complain about greedy scalpers, unaware that their greed makes it possible for those complaining to attend at all. In general, scalpers create wealth: They reallocate dckets from those who value them little to those who value them more, giving the affected pardes what they prefer to have. The fee for doing so is but a poruon of the buyers and sellers gains from trade.

AN OVERVIEW OF THE PRODUCT MARKET

The tools developed so far are sufficient for a very simplified overview of the capitalist systems answer to the what and who decisions introduced at the start of Secdon II. We will address these questions under the assumption of perfect competition. Basically, this is a market structure in which no one buyer or seller can influence the going market price by independent economic activit\. All participants are price-takers, meaning that they take the going price as outside their control; they respond to the going price but cant influence it. You, for example, are a price-taking buyer in almost everything you buy: .After all, you can buy all the tobdipaste you like at the going price, but there is effecdveh nothing you can do to influence that price. Similarly, farmers are price-taking sellers in the world wheat market; for them the going wheat price is given. Nobody would buy wheat at one cent above the world wheat price, and no farmer need sell at one cent below it. While price taking is exuemely common, perfect competition arises primarily in theory, although some real word markets clo.selv approach this model.



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