Price Ceilings And Price Floors

Price floors prevent a price from falling below a certain level.

Price ceilings and price floors. Price ceiling is a measure of price control imposed by the government on particular commodities in order to prevent consumers from being charged high prices. Effect of price ceiling price ceiling is practiced in an attempt to help consumers in purchasing necessary commodities which government. Price floors and price ceilings are government imposed minimums and maximums on the price of certain goods or services.

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. Price floors and price ceilings are price controls examples of government intervention in the free market which changes the market equilibrium.

When a price ceiling is set below the equilibrium price quantity demanded will exceed quantity supplied and excess demand or shortages will result. 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. In other words a price floor below equilibrium will not be binding and will have no effect.

They each have reasons for using them but there are large efficiency losses with both of them. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. A price ceiling is a legal maximum price that one pays for some good or service.

This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. For example in 2005 during hurricane katrina the price of bottled water increased above 5 per gallon.