Question

Why does price ceiling mean decrease quality?
why does price floor mean Increase in quality?

Answer 1

1.

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

If there is price ceiling, then there will be shortage of goods and when there is price floor, then there will be surplus quantity. Hence this leads to emergence of black market.

Since due to the price ceiling, there will be excess demand relative to its supply, so there will be an incentive for the suppliers to supply inferior quality goods because they are not able to charge higher price. Hence for increasing profit, firm decreases the quality of the products.

2.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.

Since due to an effective price floor, there will be surplus quantity of output or labor. Hence the demander of goods have the choice to choose the best products. Hence they choose only best products and lay off inferior quality of goods. Hence it can be said that price floor mean increase in quality.