Question

Explain the difference between price ceilings and price floors. What are the unintended consequences that are created because of this government intervention?

Answer 1

Answer- price floor is the lowest legal price that can be paid in market for goods and services. Example of price floor is minimum wage. When a price floor is set above the equilibrium price quantity supplied will exceed quantity demanded and excess supply or surplus will arise.

Price ceiling prevent a price from rising above a certain level. When a Price ceiling is set below the equilibrium price , quantity demanded will exceed quantity supplied and excess demand or shortage arise.

Following are the unintended consequences because of government interventions:

- deadweight loss to an economy

- shortages

-lower quantity of product