Minimum prices are price floors and are most commonly associated with minimum wages in the labour market or guaranteed price support schemes for farmers or other producers. Our basic analysis in this section focuses on this. But please be aware that there is also a debate over introducing some form of minimum pricing for consumers of de-merit goods – this will impact more directly on the demand side of a market. As with all forms of government intervention, the analysis comes first because it is easier to build solid evaluation having already explored the theoretical ideas!

1. Government Intervention –
Minimum Prices

2. Government
Intervention in Markets
Minimum Prices

3. Minimum Prices in Markets
• A minimum price is a form of of government intervention
• To be effective, a minimum price must be set above the normal
free-market equilibrium
• If it is set below, then it will have no impact
• In some cases a minimum price takes the form of a guaranteed
minimum price at which the government or a purchasing agency
will buy the products of farmers
• Examples including price support schemes in the EU
• China has recently offered a generous minimum price support
programme for their cotton farmers. Under the scheme, the
government purchased cotton from farmers at a set price,
building up a massive stockpile.
A minimum price is a price floor for a market – suppliers cannot sell
the product legally at a lower price.

4. The Debate over a Minimum Price for Alcohol
• Concerns about alcohol fuelled
violence and the public health
problems associated with excessive
drinking have fuelled the debate over
alcohol prices.
• In 2013 the UK government
abandoned plans to introduce a
minimum unit price for alcohol of
45p per unit.
• Since 2014 there has been ban on
the sale of alcohol below cost price,
defined as the level of alcohol duty
plus VAT.
• A can of average strength lager
cannot be sold for less than 40p
• A standard bottle of vodka
cannot be sold for less than
£8.89.
Arguments for a minimum price
• Reduces negative externalities from
heavy alcohol consumption
• Pubs may benefit from higher
minimum prices in supermarkets
• Can target cheaper, high strength
drinks used by younger drinkers
Arguments against a minimum price
• Minimum price is a tax on
responsible drinkers
• Producers can agree voluntary
policies on alcohol price / strength
• Better to raise alcohol duties which
will raise extra tax revenues

5. Minimum Wage Analysis Diagram
A minimum wage is a statutory pay floor that cannot be undercut
Value of the UK living wage
versus the minimum wage
2011-2014 (£ per hour)
Year Living
wage
Minimum
wage
2011 7.20 6.08
2012 7.45 6.19
2013 7.65 6.31
2014 7.85 6.50
Wage
Rate
EmplE1
Labour
Demand
W1
Labour
Supply
MW
E2 E3
In July 2014, Germany voted to introduce a
minimum wage of €8.50ph for the first time

6. Minimum Wage Analysis – Importance of Elasticity
Wage
Rate
EmplE1
Labour
Demand
W1
Labour
Supply
MW
E2 E3
Wage
Rate
EmplE1
Labour
Demand
W1
Labour
Supply
MW
E2 E3
Standard minimum wage diagram suggests
that a pay floor will lead to a contraction of
employment. But this depends on the level
at which the minimum wage is set.
If labour demand is inelastic, then a higher
minimum wage will cause only a limited
contraction on the level of labour demand.

7. Evaluating Arguments for a Minimum Wage
Case for a higher level of minimum wage
in the UK economy
Arguments against a rise in the national
minimum wage
• Equity justification: Every job should
given fair pay linked with
skills/experience of an employee.
• Jobs: Higher minimum wage adds to
the costs of employing workers and
might cause higher unemployment
• Poverty reduction: A minimum wage
boosts the take-home pay of
thousands of lower paid workers
• Small businesses: Many smaller
businesses struggle to make a profit -
risk of a rise in business closures
• Training: It encourages firms to up-
skill their workers and can lead to
higher labour productivity
• Training: There are better incentives
for training than a minimum wage e.g.
tax relief on apprenticeships
• Incentives: Will improve incentives
for people to look for paid work
• Competitiveness: Might make many
UK businesses less competitive in
global markets
• Anti-discrimination: A way of
tackling discrimination of low-paid
female / younger workers
• Inflation: Higher labour costs might
cause higher inflation which then
lowers real incomes

8. Further Evaluation: Alternatives and “It Depends On”
Policy
Intervention
Alternative
Evaluative comment
Living Wage
An optional alternative to
the minimum wage – a
growing number of firms are
signing up to this
Income Tax
Reforms
Cutting the basic rate of
income tax or lifting the tax
free allowance will boost
work incentives
Benefit
reforms
Linking benefits to
participation on work
programmes – politically
controversial
Measures to
raise labour
productivity
Most important in long run
– higher productivity boosts
wages / incomes
The effects of a national minimum wage
on employment, inflation and real
incomes of those affected depends on..
Price elasticity of demand of the firms’
products i.e. can they pass on higher
costs and continue to sell their products
The state of the economy i.e. whether
firms are sufficiently profitable to be
able to absorb a higher minimum wage
Whether a higher minimum wage
motivates workers to improve their
productivity – which will lower unit costs
Depends on the magnitude of the
change in the minimum wage and the
time scale over which it happens

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