Intervention of Government in Price Control May, 2014 | Page 3

Price Ceiling, here, is set by the government as the maximum price. The seller cannot
charge higher than the price ceiling for the particular product. Whereas, the price floor,
similarly, is the minimum allowed price set by the government, below which price the
sellers cannot sell that product.
Some economists also believe that the price ceilings and floors should not be
implemented. For example, if a product is supplied at the market ceiling, the marginal
benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare
loss. Secondly, in case of the price ceiling, the concept of the black market emerges,
where the buyers agree to purchase the product at a higher price.
This situation can be corrected in a number of ways. The government can provide
subsidies to encourage the production of such goods. However, if this happens, the
government would have to divert their funds from other sources and other activities.
The government can also produce these products themselves or release previously
stored inventory of such goods to ensure that there is no shortage in the market.
However, this will not be possible for many products, including all perishable items.
Similarly, if the products are being sold on a price floor, the demand might decrease
which will create excess surplus. The government can then purchase the surplus at a
minimum price. However, this option has consequences. Buying the surplus and storing it
will cost for warehousing, whereas if the excessive product is sold abroad, it will be
considered as dumping.

Reference:
http://www.researchomatic.com/government-interventions-in-price-control-153807.html

2