Price ceilings and floors

Sometimes the government does not let the market set the price.

Price ceiling: a legal maximum price, set below the equilibrium price, usually for necessities such as wheat, rice, kerosene and sugar, so that the poor can afford them.

• At the low price, demand is more than supply: there is excess demand, a shortage.
• So the goods must be rationed, sold in limited amounts through fair price shops (ration shops).
• People face long queues, and a black market may appear, where the goods are sold illegally at higher prices.

Rent control works the same way: rents held below equilibrium create a shortage of houses to let.

Price floor: a legal minimum price, set above the equilibrium price. Examples: agricultural price support (a minimum price for farmers' crops) and minimum wage laws.

• At the high price, supply is more than demand: there is excess supply, a surplus.
• Under price support, the government must buy the surplus at the support price, to keep the floor in place.