Price control, price ceilings and price floors essay sample

 

 

The free market usually implies certain price control from the government. Regulations are necessary to make goods affordable and slow inflation. Price ceiling and price floors are the maximum and minimum price that can be imposed by businesses. Aimed to benefit certain groups, the means of price control break the balance between the demand and supply, which means they undermine market sustainability.

Setting a price floor is a standard mechanism for governments to combat with too low prices on goods and services. Minimum wage, for example, is a kind of a price floor by which the governments takes care that employees cannot earn less than the imposed minimum. A price floor is necessary to protect manufacturers who deserve their prices to be higher than the equilibrium price. For example, farmers produce so many goods that sooner or later are forced to sell it for a miserable price. A price floor, however, decreases the demand, which means that companies will inevitably end up in an excess supply. Unsold products can be utilized in different ways. A surplus can be given to the developing countries that benefit from additional aid. But businesses will suffer from the artificial price anyway, as their goods are not demanded in the market.

Price ceilings are imposed when the government feels that consumers need a protection from excessively high prices set by manufacturers. A price ceiling works only if it is lower than the equilibrium price, which drags certain problems for manufacturers. The demand rises as consumers want more products for the lower price. Manufacturers cannot produce as much for the lower cost – that is how a supply shortage emerges. The shortage stimulates a black market which becomes an easy way to purchase scarce goods.

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