Price Ceilings & Floors
A government caps rents, or sets a minimum price for milk. The market can no longer settle by itself: a ceiling below the equilibrium creates a shortage, a floor above it a surplus. How big, and who wins or loses?
Ceilings, Floors and Their Side Effects
A price ceiling is a legal maximum, like rent control or a cap on energy prices. If it lies below the market price, more people want to buy than sellers are willing to offer: a shortage. Fewer units are traded than before, and the buyers who do get one pay less.
A price floor is a legal minimum, like a guaranteed price for farmers or a minimum wage. Above the market price, sellers offer more than buyers want: a surplus that someone has to buy up or that goes unsold. Both cause a deadweight loss: trades that would have benefited both sides no longer happen.
Market with a Price Limit
limitWho Gains, Who Loses
your inputs| Free market | With the limit | Change |
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Worked Techniques
Fill the maximum price into both curves. Only the smaller quantity, the supply, is actually traded.
For the units no longer traded, buyers would have paid more than sellers needed. That gap, added up, is lost.
At a minimum price above the equilibrium, sellers offer more than buyers take. Buying up that surplus costs the government floor × surplus.
Sources & Verification
- N. G. Mankiw, Principles of Economics, 9th ed., Cengage, 2021 — Ch. 6 (Supply, Demand, and Government Policies) and Ch. 7 (Consumers, Producers, and the Efficiency of Markets).