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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