Price ceilings and price flooring are basically price controls.
Price Ceilings
Price ceilings are set by the regulatory authorities when they believe certain commodities are sold too high of a price. Price ceilings become a problem when they are set below the market equilibrium price.
There is excess demand or a supply shortage, when the price ceilings are set below the market price. Producers don’t produce as much at the lower price, while consumers demand more because the goods are cheaper. Demand outstrips supply, so there is a lot of people who want to buy at this lower price but can’t.
Price Flooring
Price flooring are the prices set by the regulatory bodies for certain commodities when they believe that they are sold in an unfair market with too low prices.
Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below the market clearing price.
When they are set above the market price, then there is a possibility that there will be an excess supply or a surplus. If this happens, producers who can’t foresee trouble ahead will produce larger quantities.
