Final answer:
A minimum wage is an effective price control when it is a binding price floor, causing an excess supply of labor. It becomes a binding price floor when it is set above the equilibrium wage rate in a labor market.
Step-by-step explanation:
A minimum wage can be considered an effective price control when it is a binding price floor. A price floor is a minimum price set by the government to prevent the market price from falling below a certain level. When a minimum wage is set above the equilibrium wage rate in a labor market, it becomes a binding price floor, causing an excess supply of labor.
For example, if the equilibrium wage rate in a labor market is $10 an hour, and the government sets the minimum wage at $12 an hour, it becomes a binding price floor. This means that there will be more workers willing to work at $12 an hour than firms are willing to hire at that wage rate, leading to an excess supply of labor.
On the other hand, a nonbinding price floor occurs when the minimum wage is set below the equilibrium wage rate. In this case, the market wage rate is already higher than the minimum wage, so the price floor does not affect the market outcome.