Applications of Demand and Supply
4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings
- Price floors create surpluses by fixing the price above the equilibrium price. At the price set by the floor, the quantity supplied exceeds the quantity demanded.
- In agriculture, price floors have created persistent surpluses of a wide range of agricultural commodities. Governments typically purchase the amount of the surplus or impose production restrictions in an attempt to reduce the surplus.
- Price ceilings create shortages by setting the price below the equilibrium. At the ceiling price, the quantity demanded exceeds the quantity supplied.
- Rent controls are an example of a price ceiling, and thus they create shortages of rental housing.
- It is sometimes the case that rent controls create "backdoor" arrangements, ranging from requirements that tenants rent items that they do not want to outright bribes, that result in rents higher than would exist in the absence of the ceiling.