Explain the difference between a price floor and a price ceiling. Provide a situation in which a price ceiling may be used

sociality | Student

In a free market, the price charged for goods and services depends on the demand and supply of the good or service. A price floor or price ceiling is something imposed by the government as an attempt to regulate the price. It has been found that if the price floor is set above the free market price it leads to an increase in the supply and a decrease in the demand. This causes a surplus in the market. On the other hand, a price ceiling set below the free market price increases demand and decreases supply, which leads to a shortage in the market.

An example of a situation where a price ceiling may be used could be the case where the government finds that due to a lack of competitors, gasoline is being sold at a very high rate by a few firms. It could impose a price ceiling, with firms required to sell gasoline below the price ceiling that has been set. This would increase the consumption of gasoline as consumers can now buy gasoline for a price that is lesser than what it was earlier. The firms selling gasoline would try to decrease their loss by reducing the amount of gasoline they sell. Thereby a shortage of gasoline would be created in the market.