price floors and price ceilings
A price floor is a government-mandated minimum price for a good or service. An example of a price floor is the minimum wage. Producers may not pay below the legal minimum in wages for labor. A price ceiling is a government-mandated maximum price for a good or service. An example of a price ceiling is rent control. A landlord may not charge over the legal maximum in rent. The government uses price ceilings and price floors because in some instances when supply and demand intersect it is not beneficial to society as a whole. when this occurs, the government intervenes and sets a price floor or ceiling to purposely create a surplus or shortage. For a price floor to be effective, the government must set the legal minimum above the equilibrium price. For a price ceiling to be effective, the government must set the legal maximum below the equilibrium price. Both of these points are illustrated in Figure 2-7