Effects Of Price Floors And Ceilings

Price floors and price ceilings often lead to unintended consequences.

Effects of price floors and ceilings. Price floors prevent a price from falling below a certain level. Price ceilings prevent a price from rising above a certain level. Price ceilings impose a maximum price on certain goods and services. Price floors prevent a price from falling below a certain level.

When a price ceiling is set below the equilibrium price quantity demanded will exceed quantity supplied and excess demand or shortages will result. However price ceiling in a long run can cause adverse effect on market and create huge market inefficiencies. Producers won t produce as much at the lower price while consumers will demand more because the goods are cheaper. Effect of price ceiling.

They are usually put in place to protect vulnerable buyers or in industries where there are few suppliers. Some effects of price ceiling are. When the ceiling is set below the market price there will be excess demand or a supply shortage. Thus it is important for governments to be mindful of a good s price elasticity when setting price floors trying to protect vulnerable suppliers.

Price ceilings only become a problem when they are set below the market equilibrium price. Real life example of a price ceiling in the 1970s the u s. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surpluses will result. The opposite of a price ceiling is a price floor which sets a minimum price at which a product or service can be sold.