Price Floors & Ceilings

Government Price Controls in a Free Market?

Price Floor

• A MINIMUM price set by the govt that is ABOVE market equilibrium; nothing can be sold below the given price

Benefits Costs

Raise the Minimum Wage to $800/hr

Minimum Wage: Gov’t Imposed Price Floor

D1

S1

$515E1

Price Floor

.

Surplus of Supply

$800

New Minimum wage law set at 800/hr

Min. Wage Workers

Price Ceiling

• A MAXIMUM price set by govt that is BELOW equilibrium price; nothing can be sold above this price

Benefits Costs

Rent Control

Rent Control: Gov’t Imposed Price Ceiling

D1

S1

$900 E1

Price Ceiling

.Shortage of Supply

$700

Price Ceiling imposed of $700

3,000Apartments

Summary

• Price floors: (example: min. wage)

• Above market equilibrium cause a surplus of supply • Below market equilibrium have no effect

• Price Ceilings: (example: rent control)

• Above market equilibrium have no effect • Below market equilibrium cause a shortage of supply