Understanding Price Controls: Ceilings and Floors

Price Ceiling

Legal maximum on the price sellers can charge for a good or service.

Price Floor

Legal minimum on the price buyers are required to pay for a good or service.

Deadweight Loss

Amount of total surplus lost due to the inefficiently low quantity transacted.

Inefficient allocation

Price controls distort signals that would help the goods get allocated their highest-valued uses.

Inefficiently Low Quality

At the controlled price, sellers have more customers than goods.

Wasted Resources

Price controls that create shortages lead to bribery and wasteful lines.

Black Markets

Goods and services are bought and sold illegally.

Inefficiently low quantity

A predictable side effect of price ceilings.

Inefficient allocation to customers

A predictable side effect of price ceilings.

Wasted resources, time and effort

A predictable side effect of price ceilings.

Temptation to break the law

Selling below the legal price.

Illegal Activity

Encouraged by price floors.

Controlling Quantities

Governments sometimes control quantity instead of price.

Quantity Controls (Quotas)

Limit on the legal quantity of some good that can be bought or sold.

License

The right, conferred by the government, to supply a good.

Wedge

Demand Price-Supply Price of quota limit.

Costs of Quotas

Impose losses on society.

Surplus production is sometimes destroyed

An unpredictable side effect of price floors.

Wasted time and effort looking for jobs

An unpredictable side effect of price floors.

Inefficient high quality

Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

Benefit some people

A reason for implementing price ceilings and floors.