Question

What are some pros and cons for price ceilings and price floors? And how can these impact ones life?

Answer 1

Price ceiling is the maximum price of a good which is usually set by the government. The purpose of price ceiling is to prevent the price of a good form rising above a particular level.

Pros: The situation is in favour of consumers. They now pay less for the same quantity of goods. Their income level rises.

Cons: Now producers have to reduce their production because they are not making much profit. So they supply less. Now Because of lower prices consumers demand more. As a result economy suffers shortage of goods.

Now, the black marketers take advantage of this situation and set the price above the market level. As a result either consumers don't get the good or they end up paying more.

Overall, the economy suffers. Black markets are better off more than producers and consumers.

Price floor is the minimum price set by government to prevent prices from falling below a particular level. Price floors are set above the market/Eqilibrium price. It is a situation when producers want to produce more ans consumers want to consume less.

Pros: Price floors benefit producers, now they can make extra profit. For example, suppose market price for a tomato is $5, but the price floor is $7. Now, farmers can make extra profit of $2 per tomato.

Cons: Extra profit motivates producers to produce more, so their produce more than the demand. Now, consumers end up paying Higher prices, so they are worse off. This discourages consumers to demand more. So demand declines. This leads to surplus of goods in the economy. This is harmful for  producers as now they are left with excess inventory. That is they have goods they can't sell. Overall, the economy is at loss because there is lack of efficient allocation of resources.