Question

Price controls can be divided into two opposing categories: Price Ceilings and Price Floors. Lets discuss the need for controls and the effect on the efficient market. What would be the effects of using price controls to intervene in a "well functioning, competitive market"? Who are the "winners and losers" in price floors and ceilings? Give examples.

Answer 1

Price floor- It is the minimum price set by the government above the equilibrium market price. It is charged mainly in agriculture sector to protect the interest of the farmers. It leads towards the surplus and due to price floor supply exceeds than demand and increase producer surplus and decreases consumer surplus. Example of product on which price flooring can be done is wheat in agriculture. The purpose of price floor to stop the fluctuations in the agriculture product prices.

Price ceiling -It is the minimum price set by the government below the equilibrium market price. It is charged mainly on basic goods to protect the interest of the consumers. It leads towards the shortage and due to price ceiling supply shrinks than demand and increase consumer surplus and decreases producer surplus. Example of product on which price flooring can be done is rent on houses. The purpose of price ceiling to stop the fluctuations in the house rent prices. In this way, government tries to provide shelter to every human being.