Price Ceilings, Price Floors, and Quotas

efficiency

maximizing total surplus (CS + PS) where the “best” trades occur (all buyers with higher values are able to trade with sellers with lower costs; DWL = 0).

price ceiling

government set maximum price (eg. rent control)

binding

ceiling is below equilibrium price; has impact on market

non-binding

ceiling is above equilibrium price; does not impact market

shortage

binding ceiling creates a _______

price floor

government set minimum price (eg. minimum wage, agriculture products)

binding

floor is above equilibrium price; has impact on market

non-binding

floor is below equilibrium price; does not impact market

surplus

binding floor creates a _______

quota

maximum quantity that is allowed to be traded in a market. No limitation on price, price is determined by market

binding

quota is to the left of equilibrium quantity; has impact on market

non-binding

quota is to the right of equilibrium quantity; does not impact market