Price Ceiling and Price Floor

Price Ceiling and Price Floor are two economic concepts which are often conflated. Price Ceiling refers to the maximum price that a seller can sell a product for, while Price Floor refers to selling each product at the actual minimum price. The prices set by these terms vary not just among products, but among different markets as well. This article will highlight the difference between Price Ceiling and Price Floor, provide examples of how they operate in real life and discuss their practical consequences on consumers who are affected by them.

What is Price Ceiling?

A Price Ceiling is the maximum price that a seller can charge for a good. It is a government-imposed restriction on how much a seller can charge for products, which limits the seller’s revenue and profit. Price Ceiling may come in the form of direct price regulation or indirect price regulation, but both mechanisms function to set the maximum product price. Some arguments imply that an effective Price Ceiling would not result in greater price competition among sellers and lower prices for consumers, but those arguments generally neglect other factors in the market such as potential changes in demand and supply due to changes in prices.

What is the Price Floor?

A Price Floor is a minimum price that a seller can sell its product for. It is an artificial price set by the government above the natural market equilibrium, from which sellers are not allowed to deviate. The purpose of the Price Floor is to ensure that each product is sold at a minimum price that is deemed “fair”, even if that price does not reflect the market forces of supply and demand (which are thinned by the artificial ceiling).

Price Floor: Examples

• Minimum Wage

 A minimum wage is a price floor on the labour market which is legislated by some governments. It is a mandated minimum wage which employers are required to pay to employees.

• Rent Control

Rent control refers to regulations that are written in local land codes and ordinances regarding how much landlords can charge tenants in rent (a form of price control on the rental market).

What is the Real-Life Consequence of Price Ceiling and Price Floor?

Price Ceiling and Price Floor have real-life consequences for the consumer, who ultimately pays for the product whether or not he consumes it. However, the effects are felt differently based on the type of product, and whether or not it is a necessity.

For Example:

Price Ceiling on Milk/Milk Products

The price Ceiling on milk and milk products is a policy that has been practised in some countries to help farmers. The government imposes a maximum price along with supply and demand restrictions to keep farmers from losing money when selling milk. However, the net consequence of this is that the amount of milk produced will decrease making it unprofitable to produce milk at those prices. However, the amount of milk that is produced by consumers will not decrease as much, since it is generally a necessity and thus consumers would not be affected by a price ceiling on milk. One consequence of this is that the government may have to impose new regulations to sustain or even increase the amount of milk in order to maintain the minimum price at which it sells its product.

Price Ceiling on Cigarettes

Price Ceiling on cigarettes and cigarette products can affect how much product is supplied in different markets. In some cases, a certain country may impose a price ceiling on cigarettes so as to keep them from being exported. This can also limit how many of those products are manufactured domestically.

Differences between Price Ceiling and Price Floor

• Different limits

The price Ceiling limits how much a seller is allowed to charge for a product. A Price Floor only limits the lowest price that a seller can sell a product for, not how much the seller can charge for them. For example, in some cases, the government may want to keep prices of tobacco products below $5 USD per pack and thus regulate their sale by setting an artificial limit at that level. In other cases, they may want to set an artificial ceiling on the lowest price these products can be sold for so as to remove market distortions through lower prices. They may only want to limit the supply of these products while allowing them to be sold at whatever price the market determines.

• Differences based on product and situation

Price Ceilings and Price Floors are not always synonymous, as each situation depends on certain factors that influence their decisions. For example, if a government does not want milk farmers to lose money, it will establish an effective Price Ceiling for milk by placing a limit on how much milk farmers can charge for milk or milk products. If a government wants to regulate the tobacco industry by restricting imports or lowering consumption, it might implement an effective minimum price (an actual Price Floor) rather than an artificial maximum price (a Price Ceiling).

• Implementation in different ways

Price Ceiling is a more common manifestation of price control, but Price Floors are also used. A Price Floor aims to regulate the lowest that a seller can sell a product, and thus limit the market distortions that result when supply and demand are not allowed to determine the price. Most countries have both a Price Ceiling and a Price Floor. Some countries also have laws or regulations on how they should be enforced. For example, some Japanese grocery stores cannot charge more than 1 yen (about 15 cents) for each item on the store shelves. This law is enforced through ad campaigns that advertise: “1 Yen = 1 hour of leisure time” and “1 Yen = 1 second at an amusement park”.

• To implement quotas or other price-based policies

Price Floors and Price Ceilings have been used by governments to implement quotas and other policy goals. Quotas in the sale of milk are a common example of government regulation through an effective Price Floor. Other examples include minimum wages, where governments have set an effective minimum wage that employers must pay to employees.

• As a way to coerce businesses into complying with policy goals

Price Floors and Price Ceilings are also used in combination with laws or regulations that compel businesses to comply with certain policies.

Conclusion

The government may use a number of strategies to limit consumption. The most effective strategies are to regulate supply by controlling the prices that sellers can charge for a product. Of these, Price Floors and Price Ceilings are the most common, although in some cases the government may want to use both as part of an overall pricing strategy.