Price Ceilings And Price Floors That Are Binding
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A government imposes price ceilings in order to keep the price of some necessary good or service affordable.
Price ceilings and price floors that are binding. A price ceiling is a legal maximum price that one pays for some good or service. Price ceilings prevent a price from rising above a certain level. Although both a price ceiling and a price floor can be imposed the government usually only selects either a ceiling or a floor for particular goods or services.
Price floors are a common government policy to manipulate the market. When a binding price floor is used it will create a deadweight loss if the market was efficient before the price floor introduction. In other words a price floor below equilibrium will not be binding and will have no effect.
A price ceiling is the legal maximum price for a good or service while a price floor is the legal minimum price. When a price ceiling is set below the equilibrium price quantity demanded will exceed quantity supplied and excess demand or shortages will result. A price ceiling is a legal maximum price but a price floor is a legal minimum price and consequently it would leave room for the price to rise to its equilibrium level.
They are generally used to increase prices such as wages but are only effective binding when placed above the market price. For example in 2005 during hurricane katrina the price of bottled water increased above 5 per gallon. The next section discusses price floors.
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