Price Ceiling and Price Floor
Governments keep on trying to control prices by minimizing or maximizing the prices. Further, in order to achieve economic efficiency, consumers and producers who are not satisfied with outcome of the market can make efforts for convincing government to impose price ceilings or price floors. Price ceiling is legally determined highest price that is imposed by the government that a seller can charge, while price floor is legally determined lowest price that sellers can receive. Price ceilings pave the way to an increase in consumer surplus, decrease in producer surplus, and become basis for causing deadweight loss (Hubbard, Garnett, Lewis and O’Brien p. 132). However, price floors increases producer surplus, and decreases consumer surplus, and it also lead to creation of deadweight loss. However, consequence of imposition of price ceiling and price floor is that some individuals win, and some individuals loss (Hubbard, Garnett, Lewis and O’Brien p. 133). Further, economic efficiency is also lost because of price ceiling and price floor. Further, price floor and price ceiling also become basis of black market in which selling and buying of goods take place at prices that are not according to regulations of government. Price ceiling is effective as it prevent suppliers from charging high price, and it also becomes necessary during inflationary period for maintaining standard of living. It makes living cost affordable for people in days of inflation. However, price floor is effective for producers, because it put a lower price for their goods to be sold, but this price is above the price of market. It makes producers capable of selling their goods at price that is above the normal price, allowing them to earn more or extra profit. It helps in ensuring high price so that more products can be produced.
References
Hubbard, R. Glenn, Anne M. Garnett, Philip E. T. Lewis, and Anthony Patrick O'Brien. Microeconomics. Australia: Pearson Australia Group Private Limited, 2015.
