Economics: Price floor and ceiling

Price controls

setting of minimum or maximum prices by government (or private organizations) so that prices are unable to adjust to their equilibrium level determined by demand and supply.
— Price controls result in market disequilibrium, and therefore in shortages (excess demand) or surpluses (excess supply)

Price ceiling

A maximum price set below the equilibrium price, in order to make goods more affordable to people on low incomes.

Consequences for market (ceiling)

-shortages
-non price rationing
-underground/parallel markets
-under allocation of resources to the good and allocative inefficiency
-negative welfare impacts

Welfare loss (deadweight loss)

Represents social surplus or welfare benefits that are lost to society because resources are not allocated efficiently

Price ceiling create...

Welfare loss , indicating that the price ceiling introduces allocative inefficiency due to an under allocation of resources to the production of the goods. This is shown by Qs < Qe. Also, MB > MC, indicating that society is not getting enough of the good.

Consequences for stakeholders (ceiling)

-consumers partly gain and lose
-producers are worse off
-workers unemployment due to firing
-government no gains or no losses

Rent controls

consist of maximum legal rent in housing, which is below the market-determined level of rent (the price of rental housing). It's undertaken by government in some cities around the world to make housing more affordable to low-income earners.

Consequences of rent controls

-housing becomes more affordable to low income earners
-shortage of housing, Qd (at legally maximum rent) > Qs
-long waiting lists of tenants wanting a flat
-underground market
-rundown poorly maintained rental houses

Food price controls

Some governments use food price controls as a method to make food more affordable to low-income earners, especially during times when food prices are rising rapidly

Price floor

A minimum price set above the equilibrium price, in order to provide income supporters to farmers or to increase the wages of low-skilled workers.

Consequences for markets (floor)

-surpluses
-government measures to dispose of surpluses
-firm inefficiency
-over allocation of resources to the production of the good and allocative inefficiency
-negative welfare impacts

Price floor creates...

welfare loss, indicating that the price floor introduces allocative inefficiency due to an overallocation of resources to the production of the good, shown by Qs > Qe. Also MB < MC, indicating that society is getting too much of the good.

Consequences for stakeholders (floor)

-consumers worse off
-producers gain as they receive a higher price and produce a larger quantity
-workers are likely to gain employment increase
-government is burdened on its budget
-stakeholders in other countries have lower world prices due to extra supply in available world markets