Markets tend toward equilibrium, but in some cases the government steps in to control prices.
Government Intervention Price ceilings can be imposed by the government to set the maximum price that be legally charged for a good. Price floors can be imposed by the government to set the minimum price for a good or service.
Price Ceilings Governments place price ceilings on some goods that are considered essential and might become too expensive for some consumers. Example: Ceilings on apartment rent (rent control)
Price Ceilings Rent control reduces the quantity and quality of housing, so it helps some households and hurts others, including many poor households.
Problems with Price Ceilings Price ceilings increase the quantity demanded but decreases the quantity supplied. Who decides which of the 20,000 of the 40,000 households get an apartment? Long waiting lists, bribes, corruption. Ending rent control hurts some, helps others.
Price Floors Price floors are often imposed when government wants sellers to receive some minimum reward for their efforts.
Price Floors Minimum Wage – price floor that sets a minimum price that an employer can pay a worker for an hour of labor. Set by federal government – states can set it higher. If the minimum wage is set above the market equilibrium wage rate, the result is a decrease in employment.
Price Floors in Agriculture Used for many farm products. Until 1996, the US set minimum prices for several products. Not legal limits. When prices fell below the price floor, the government created demand by buying excess crops.
Price Floors in Agriculture Congress abolished agricultural price floors because they conflicted with free enterprise. Today, the government responds to low product prices with emergency financial aid.