Price Floors and Price Ceilings

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Kristen Fowler
Economics
April 16, 2012

n  Price Controls: How efficient are price ceilings and price floors? If you think one is better than the other, make sure to bring up examples from our economy to validate your stand.  

Price ceilings and price floors are essential aspects of our economy. Price ceilings are government enacted laws preventing suppliers from establishing prices of key resources higher than a certain price, which is set by the government. Price floors are price minimums that can be charged for a good or service. These price controls are put in place in order to maintain an affordable lifestyle and protect consumers from suffering form unfair inflation. However, when not executed properly, price controls can become ineffective. Price ceilings are enacted in order to benefit consumers. Price ceilings prevent businesses from charging unfair prices. For example, if only one seller has access to a certain product that is a necessity to consumers, without a price ceiling they have the ability to charge an outrageous price. Price ceilings also assist in keeping the cost of living reasonable in the case of high inflation. If prices rise faster than incomes do, people will be unable to maintain a comfortable standard of living. However, when enacted out improperly price ceilings can have a negative outcome. It is important that price ceilings are set above the market price. If a price ceiling is set below the market price, it will result in a shortage. An example of misuse of price ceilings is when a price ceiling is established on a product in which the price is thought to be too high; however a more efficient means of solving this problem would be to increase production. An ineffective price ceiling is one that is set above the market equilibrium price. The product is already selling for much lower than the price ceiling, so unless the price greatly increases, the price ceiling serves no vital purpose.

Price floors are a government...
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