APMacro: Government Set Prices

Prices in most markets are free to rise or fall to their equilibrium levels no matter how high or low those levels might be. Government sometimes concludes that supply and demand will produce prices that are unfairly high for buyers or unfairly low for sellers. So government may place legal limits on how high or low a price or prices may go.

A price floor is a minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not. Price floors above equilibrium prices are usually invoked when society feels that the free functioning of the market system has not provided a sufficient income for certain groups of resource suppliers or producers. Supported prices for agricultural products and current minimum wages are two examples of price or wage floors. The effects of a price floor is the quantity supplied will exceed the quantity demanded which creates a surplus.

price floor_price ceiling

A price ceiling sets the maximum price a seller may charge for a product or service. A price at or below the ceiling is legal; a price above it is not. The rationale for establishing price ceilings or ceiling prices on specific products is that they enable consumers to obtain essential goods or services that they could not afford at the equilibrium price.An example is rent control, which specify the maximum price in form of rent that can be charged. The government has at times imposed price ceilings either on all products or on a very wide range of products to try to restrain inflation. The effects of a price ceiling is the quantity demanded is greater than the quantity supplied which creates a shortage.



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