How do price ceilings and floors impact market outcomes?

Price ceilings and floors distort market outcomes, leading to surpluses or shortages and potential inefficiencies.

Price ceilings are maximum prices set by the government for certain goods and services that it believes are being sold at too high a price and that consumers should be protected against. When a price ceiling is set below the equilibrium price, it results in a shortage. This is because the quantity demanded exceeds the quantity supplied at the lower price. For example, rent control policies in some cities set a maximum price that landlords can charge tenants. While this may make housing more affordable for some, it can also lead to a shortage of quality housing as landlords may not have the incentive to maintain properties or build new ones.

On the other hand, price floors are minimum prices set by the government for certain goods and services. They are often used to give producers a higher income. When a price floor is set above the equilibrium price, it results in a surplus. This is because the quantity supplied exceeds the quantity demanded at the higher price. For instance, minimum wage laws are a type of price floor. They set a minimum price for labour that employers can pay. While this can increase income for some workers, it can also lead to unemployment if employers cannot afford to pay the minimum wage and therefore hire fewer workers.

Both price ceilings and floors can lead to inefficiencies in the market. They prevent the market from allocating resources in the most efficient way, as they disrupt the balance between supply and demand. This can lead to deadweight loss, which is a loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved. Furthermore, price ceilings can lead to black markets where the good or service is sold illegally at a higher price, while price floors can result in wasted resources if the surplus goods cannot be sold.

In conclusion, while price ceilings and floors may be implemented with good intentions, they often lead to unintended consequences and distortions in the market.