More than one reason may exist for policymakers to impose a price ceiling or price floor in a market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers.
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Using the graph shown, analyze the effect a $300 price ceiling would have on the market for ten-speed bicycles. Would this be a binding price ceiling?
ANSWER: For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. A price ceiling is binding if it is set at any price below equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price ceiling.
Price Floors and Price Ceilings are Price Controls, examples of government intervention in the free market which changes the market equilibrium. They each have reasons for using them, but there are large efficiency losses with both of them.
Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance. Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price.
Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price.
Learn more about Price Floors and Ceilings at Econport.org and Khanacademy.org.