Price ceilings and floors

What is a price ceiling?

A maximum price set by the government or an industry regulator to prevent the market price from rising above a certain level.

What must a price ceiling be set below to have an effect?

A price ceiling must be set below the normal free market equilibrium price to have any effect on price and output.

What is one advantage of price ceilings?

They hold prices down, providing consumer welfare gains.

How can price ceilings incentivize businesses?

They can incentivize businesses to cut costs to maintain profits.

What is a major disadvantage of price ceilings?

They reduce profits, leading to less money for capital investment.

What effect can price ceilings have on market entry for new competitors?

They may dissuade new entrants from entering the market due to diminished profit potential.

What is a price floor?

A minimum price that suppliers cannot legally sell products below.

What happens if a price floor is set below the normal free market equilibrium?

There will be no impact as the market price will remain unchanged, leading to potential surpluses and inefficiencies.

Why is a price floor considered government intervention?

Because it sets a legal minimum price that affects how suppliers can sell their products.

What must a price floor be set above to be effective?

A price floor must be set above the normal free market equilibrium price.