The dashed line of graph b represents the government’s imposed maximum price (ceiling price) above the market-determined equilibrium price, and has no measurable affect on the product’s price in this case, the market is unable to produce a price as high as the ceiling price. 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 ceiling is practiced in an attempt to help consumers in purchasing necessary commodities which government believes to have become unattainable for consumers due to high price however, price ceiling in a long run can cause adverse effect on market and create huge market inefficiencies. When binding price ceiling remains in place for an extended period of time, it has noticeable long-term effects binding price ceiling defined a binding price ceiling occurs when the government sets a required price on a good or goods at a price below equilibrium.
A price ceiling policy is designed to prevent prices from rising above some predetermined limit on an indeterminate number of products in an economy a price ceiling policy and a price controls policy are essentially two names for the same phenomenon. A price ceiling is a government imposed maximum price that may be charged for a good or service, which can lead to shortages given the existence of relative scarcity, resources can be rationed by.
With a price ceiling, the government forbids a price above the maximum a price ceiling that is set below the equilibrium price creates a shortage that will persist suppose the government sets the price of an apartment at p c in figure 410 “effect of a price ceiling on the market for apartments”. Price ceilings that lead to higher prices there is a substantial body of research showing that under some circumstances price ceilings can, paradoxically, lead to higher prices the leading explanation is that price ceilings serve to coordinate collusion among suppliers who would otherwise compete on price.
Price floors when a price floor is set, a certain minimum amount must be paid for a good or service if the price floor is below a market price, no direct effect occurs if the market price is lower than the price floor, then a surplus will be generated minimum wage laws are good examples of price floors.