Price Floors and Price Ceilings
Exploration: What are the effects of government-set price floors and ceilings on shortages and surpluses?

Government authorities often feel political pressure that a market price is either unfairly high to buyers or unfairly low to sellers. Sometimes the government responds by establishing a legal limit on how high a price can be charged (called a price ceiling) and on how low a price can be charged (called a price floor). However, price ceilings and price floors create shortages and surpluses that persist for as long as the government set price prevails. Let’s use an interactive graph to examine the consequences of government-set prices The graph shows a typical market in equilibrium at price Pe. To illustrate the impact of a government-set price click inside the red box to establish an effective price floor or click inside the blue box to establish an effective price ceiling. Once a floor or ceiling price has been established, you can drag on the blue triangle price slider to adjust prices within the legal range.

1. How will a price floor affect a competitive market?
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2. How will a price ceiling affect a competitive market?
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3. Experiment on your own. After establishing a price floor or price ceiling with the mouse, click on the level just established and drag it within the box to change its level. What generalizations can you draw regarding the level of the price floor or price ceiling and the size of the resulting surplus or shortage? Why can’t you reduce the price floor below equilibrium or increase the price ceiling above equilibrium?
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