Impact Of Price Floors And Ceilings

Price floors and ceilings are inherently inefficient and lead to sub optimal consumer and producer surpluses but are.

Impact of price floors and ceilings.

Buyers and sellers would both benefit from trade at a higher price but cannot since it is illegal for price to rise. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. Likewise since supply is proportional to price a price floor creates excess supply if the legal price exceeds the market price. Binding floor price gives chance to the government to set prices on certain goods that are high and it also creates economic disequilibrium.

Price ceiling is practiced in an attempt to help consumers in purchasing necessary commodities which government believes to have become unattainable for consumers due to high price. Price ceilings create a dead weight loss by forcing qs below the market q. However price ceiling in a long run can cause adverse effect on market and create huge market inefficiencies. Price ceilings set below the market price cause qs to be less than the market q.

A price ceiling below the market price creates a shortage causing consumers to compete vigorously for the limited supply limited because the quantity supplied declines with price. This is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times. Unlike floor price the price ceiling helps to protect the buyers from overpaying. This happens when there are expectations that the price may rise going ahead.

Price floors and price ceilings often lead to unintended consequences. Effect of price ceiling. Price ceiling advantages price ceilings help prevent suppliers from engaging in price gouging or charging outrageously high prices for limited goods or services simply because they are able to. In case there is an equilibrium price then the price ceiling is set below it.

Like a price floor a price ceiling can be set above the equilibrium price in some exceptional situation. Price ceilings are also beneficial for keeping the cost of living affordable during periods of high inflation. Price floors prevent a price from falling below a certain level.