How Price Floors Affect Market Outcomes

To examine the effects of another kind of government price control let’s return to the market for ice cream. Imagine now that the government is persuaded by the pleas of the National Organization of Ice-Cream Makers. In this case the government might institute a price floor. Price floors like price ceilings are an attempt by the government to maintain price at other than equilibrium levels. Whereas a price ceiling places a legal maximum on price a price floor places a legal minimum.

When the government imposes a price floor on the ice-cream market two outcomes are possible. If the government imposes a price of when the equilibrium price is we obtain the outcome. In this case because the equilibrium price is above the floor the price floor is not binding. Market forces naturally move the economy to the equilibrium and the price floor no effect.

What happens when the government imposes a price floor. In this case because the equilibrium price of is below the floor the price floor is a binding constraint on the market. The forces of supply and demand tend to move the price toward the equilibrium price but when the market price hits the floor it can fall no further. The market price equals the price floor. At this floor the quantity of ice cream supplied exceeds the quantity demanded. Some people who want to sell ice cream at the going price are unable to. Thus a binding price floor causes a surplus.

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