Price ceilings and floors

Price ceilings

Maximum prices=>

• The gov. or an industry regulator can set a maximum price to prevent the market price from rising above a certain level

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

Advantages

• A useful surrogate for completion

• Hold prices down- consumer welfare gains

• Incentives for business to cut costs to maintain profits

Disadvantages

• Reduces profits - less money for capitl investment

• May dissuade people that are new to this market from entering, as the potential for profit is diminished, thereby limiting competition and innovation.

• Firms might raise prices in other ways

Price floors

Minimum Price=> Suppliers cannot sell products legally at a lower price

• A form of gov. intervention

• It must be set above normal free market equilibrium

• If set below there will be no impact as the market price will remain unchanged, leading to potential surpluses and inefficiencies in the market.