Price Floor and Price Ceiling Example

Price Ceiling
 A price ceiling is the maximum amount a firm is permitted to charge for a good or
service by the government
 An example of this is rent regulation (rent controls) in New York City and the New
York State in the 1940s.
 After WW2, house prices were rising significantly after a recent shortage in the
supply of houses.
 By introducing a rent control, on specific buildings only (which was later widened to a
more inclusive range of buildings in 1970), it allowed citizens access to affordable
housing in the cities.
 The original aim was to maintain a sufficient supply of houses, however it did end up
leading to a further shortage and therefore higher prices from firms trying to
maintain their profits.

Price Floor
 A price floor is the lowest price a firm can legally charge for a good or service they
are selling, which is set by the government above the market equilibrium price.
 An example of this is the minimum wage, which is the minimum amount firms are
allowed to pay their workers.
 A disadvantage of this is unemployment, where the supply of workers has increased
leading to a surplus, but the demand doesn’t match it.
 However, by setting a price floor it ensures that worker aren’t being given a
disadvantage pay by their workers and that it provides a minimum compensation for
suppliers.