Some government intervenes in the market when it is observed that prices are either too low or too high for either customers or producers. These prices established by government are called Price controls.
There are two types of price controls.
- Price Ceilings
- Price Floors
Types of Price Controls
1. Price Ceiling
Price ceiling is the maximum price that seller can legally charge for a product. A price at ceiling or below is legal but above is not. Price ceiling are established when it is felt that equilibrium price is very high for customers. Example rent controlled sometimes, rents in the market become very high and it became very difficult for people to live in a rents home. So normally governments have frequently intervened to establish rent control.
The resulting problems have been shortage of houses for rent. In some cases black market have also existed to handle the shortage problems. Also establishing price control requires that government need to supervise that people are following the price controls. This means more administrative cost for the government.
Administrative cost include, cost of more police, more law suits, overburden courts and prison Price ceiling is for customers benefit.
2. Price Floors
Price floor is the minimum legal price fixed by the government. A price at or above the price floor is legal a price below is not legal. Price floors are generally established above the equilibrium price. Price floors are established when society feels that the free functioning of the market system has not provided sufficient income for certain groups of resource suppliers or producers. Normally agricultural products have price floors minimum wage is another example of price floors. When the price floors are established quantity supplied becomes more than quantity demanded resulting surplus. To handle the surplus government has two options.
- It can restrict supply.
- If the government is not successful in restricting surplus then the government should purchase the surplus at price floor.
March 07, 2019