What Are The Effects Of Price Ceilings And Price Floors

Price floors and price ceilings are government imposed minimums and maximums on the price of certain goods or services.

What are the effects of price ceilings and price floors. If price ceiling is set above the existing market price there is no direct effect. Price floors prevent a price from falling below a certain level. Price floors and ceilings are inherently inefficient and lead to sub optimal consumer and producer surpluses but are nonetheless necessary for certain situations.

The next section discusses price floors. But if price ceiling is set below the existing market price the market undergoes problem of shortage. This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times.

In other words a price floor below equilibrium will not be binding and will have no effect. A price ceiling keeps a price from rising above a certain level the ceiling while a price floor keeps a price from falling below a given level the floor. When a price ceiling is set below the equilibrium price quantity demanded will exceed quantity supplied and excess demand or shortages will result.

Price ceilings prevent a price from rising above a certain level. Price floors prevent a price from falling below a certain level. A price ceiling is a legal maximum price but a price floor is a legal minimum price and consequently it would leave room for the price to rise to its equilibrium level.

When price ceiling is set below the market price producers will begin to slow or stop their production process causing less supply of commodity in the market.