Government policies and

Efficiency of Markets
Lecture 4
Evaluating the market
Equilibrium
 A price ceiling sets the maximum legal price a seller may charge
for a product or service. A price at or below the ceiling is legal; a
price above it is not. The rationale for establishing price ceilings
Price Ceilings (or ceiling prices) on specific products is that they purportedly
enable consumers to obtain some “essential” good or service that
they could not afford at the equilibrium price.
 A price floor is a minimum price fixed by the government. A price
at or above the price floor is legal; a price below it is not. Price
floors above equilibrium prices are usually invoked when society
Price Floor feels that the free functioning of the market system has not
provided a sufficient income for certain groups of resource
suppliers or producers.
Welfare Analysis of
Price Ceilings
Welfare Analysis of
Price Floor
Tax Incidence and
Efficiency Loss