5.1 Government-Controlled Prices LO 1
Government price controls are policies that attempt to hold the price
of some product at a disequilibrium value—a value that could not be
maintained in the absence of the government’s intervention.
A binding price floor is set above the equilibrium price; a binding
price ceiling is set below the equilibrium price.
Binding price floors lead to excess supply. Either the potential sellers
are left with quantities that cannot be sold, or the government must
step in and buy the surplus.
Binding price ceilings lead to excess demand and provide a strong
incentive for black marketeers to buy at the controlled price and sell
at the higher free-market (illegal) price.