Difference Between Price Ceiling and Price Floor

Difference Between Price Ceiling and Price Floor

4 mins readComment
Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Mar 29, 2024 17:18 IST

Price ceiling and price floor are two different forms of price control mechanisms implemented by governments or regulatory authorities. The main difference between these two is that a price ceiling is the maximum legally allowed price that can be charged for a particular good or service. In contrast, a price floor is a minimum legally allowed price that can be charged for a particular good or service. 

Price ceiling and price floor

A price ceiling creates a shortage in the market as the quantity demanded exceeds the quantity supplied at the ceiling price. On the other hand, a price floor creates a surplus in the market as the quantity supplied exceeds the quantity demanded at the floor price.

Table of Content

Comparative Table: Price Ceiling and Price Floor

Benchmark Price Ceiling Price Floor
Definition A maximum legally allowed price set below the equilibrium price A minimum legally allowed price set above the equilibrium price
Purpose To keep prices affordable for consumers, especially for essential goods and services To protect the income of producers or suppliers, especially in industries like agriculture
Effect on Market Creates a shortage (Quantity demanded > Quantity supplied) Creates a surplus (Quantity supplied > Quantity demanded)
Impact on Producers Discourages production due to lower profitability Encourages production due to higher guaranteed prices
Impact on Consumers Benefits consumers with lower prices Burdens consumers with higher prices
Government Intervention Controls the maximum allowed price Controls the minimum allowed price
Unintended Consequences Can lead to black markets or illegal trading Can lead to waste or overproduction

Difference Between Microeconomics and Macroeconomics
Difference Between Microeconomics and Macroeconomics
Macroeconomics studies the performance of economies. It is the study of inflation, changes in economic output, balance of payments and interest and foreign exchange rates. It is the study of...read more

Understanding Supply and Demand In Economics
Understanding Supply and Demand In Economics
Demand is the consumer’s desire for a good or service. Demand can increase or decrease based on several factors. Supply represents the capability or willingness of a seller to provide a...read more

What is a Price Ceiling?

A price ceiling is the maximum legally allowed price for a particular good or service. 

It is set below the equilibrium price that would have prevailed in a free market. The primary purpose of a price ceiling is to keep prices affordable for consumers, especially for essential goods and services like rent, utilities, or basic food items.

Here are some of the major effects of a price ceiling on market:

  • Producers have less incentive to supply the good or service, leading to lower production levels.
  • In extreme cases, a price ceiling can cause black markets or illegal trading to emerge.

What is Consumer Equilibrium?
What is Consumer Equilibrium?
The consumer’s equilibrium is when he finds his greatest utility for prices and income. A consumer is in equilibrium when his income is sufficient to obtain the desired goods. The...read more

What is Microeconomics: An Overview of its Concepts
What is Microeconomics: An Overview of its Concepts
Microeconomics plays a pivotal role in understanding how individuals and firms make choices regarding resource allocation, pricing, and production. It empowers us to comprehend market dynamics, make informed decisions, and...read more

What is the Price Floor?

A price floor is a minimum legally allowed price that can be charged for a particular good or service. 

It is set above the equilibrium price that would have prevailed in a free market. The primary purpose of a price floor is to protect the income of producers or suppliers, especially in industries like agriculture, where prices can fluctuate significantly.

Here are some of the significant effects of a price floor on the market and consumers:

  • Producers are incentivised to oversupply the good or service, leading to higher production levels.
  • Consumers may face higher prices and reduced consumption due to the price floor.

Indifference Curve: Properties and More
Indifference Curve: Properties and More
An indifference curve is a graphical representation in microeconomics showing different combinations of two goods that yield the same level of satisfaction to a consumer. The slope of the curve...read more

What are the Central Problems of an Economy?
What are the Central Problems of an Economy?
The central problems of an economy revolve around what to produce, how to produce, and for whom to produce. These issues stem from the fundamental economic problem of scarcity, necessitating...read more

Key Differences Between Price Ceiling and Price Floor

Here are the key differences:

Purpose

  • Price ceiling aims to keep prices affordable for consumers
  • Price floor aims to ensure minimum prices for producers/suppliers

Effect on Market

  • Price ceiling creates a shortage (Quantity demanded > Quantity supplied)
  • Price floor creates a surplus (Quantity supplied > Quantity demanded)

Impact on Producers

  • Price ceiling discourages production due to lower profitability
  • Price floor encourages production due to higher guaranteed prices

Impact on Consumers

  • Price ceiling benefits consumers with lower prices
  • Price floor burdens consumers with higher prices

Government Intervention

  • Price ceiling controls the maximum allowed price
  • Price floor controls minimum allowed price

Read more articles related to Economics:

Demand Forecasting: Methods and Types
Demand Forecasting: Methods and Types
While forecasting is crucial for every business, it is not full proof and has the scope of errors. Demand forecasting is useful for evaluating those factors that affect the demand...read more

Regression Analysis in Machine Learning
Regression Analysis in Machine Learning
In this article, we will discuss Regression analysis in Machine Learning which is one of the  important concepts used in building machine learning models.

Understanding Opportunity Cost: The Value of Choice
Understanding Opportunity Cost: The Value of Choice
This article explores the concept of opportunity cost, highlighting its importance in personal and business decision-making. Learn how to make more informed choices by considering the trade-offs and alternatives and...read more

What is Privatisation: Objectives and Methods
What is Privatisation: Objectives and Methods
Privatization is the process of transferring ownership and control of public assets and services from the government to the private sector. It aims to promote competition, efficiency, and innovation by...read more

Different Types of Markets in Economics
Different Types of Markets in Economics
Explore various types of markets in economics, from perfect competition to monopolies labour markets to online marketplaces. The study of these markets to understand how they function and impact the...read more

FAQs

How do price ceilings and price floors affect market efficiency?

Price ceilings and price floors distort the free market mechanism and lead to inefficient allocation of resources. The price ceiling causes a shortage, and from this, it causes a deadweight loss to society since some of the consumers are willing to pay the market price but

What are some examples of price ceilings and price floors?

Examples of price ceilings include rent controls, maximum prices for utilities or gasoline, and wage ceilings. Examples of price floors include minimum wage laws, agricultural price supports, and minimum prices for certain imported goods (tariff rates).

How do governments enforce price ceilings and price floors?

Government intervention is possible in the form of a price ceiling or price floor through methods such as legislation, regulation, punishment, and enforcement of laws at the business level through fines and penalties. In addition, the government can put in a rationing system or set up subsidies or taxes to influence market prices.

Can price ceilings and price floors co-exist in the same market?

Yes. It is possible for price ceilings and price floors to co-exist in the same market for different goods or services. For example, a government may impose a price ceiling on rent while also setting a price floor for agricultural products.

What are some alternatives to price ceilings and price floors?

Except for the price ceiling and price floor, other options would be subsidies, taxes, income transfers, or other market mechanisms that don't control prices but indirectly affect them. Any of these might be an alternative that better resolves the ultimate problems without seriously distorting the market prices and quantities.

About the Author
author-image
Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio