How Price Floors Affect Market Outcomes

To examine the effects of another kind of government price control, let's return to the market for ice cream. Imagine now that the government is persuaded by the picas of the National Organization of Ice-Cream Makers. In this case, the government might institute a price floor. Price floors, like price ceilings, are an attempt by the government to mo in tain prices at other than equilibrium levels. Whereas a price ceiling places a legal maximum on prices, a price floor places a legal minimum.

When the government imposes a price floor on the ice-cream market, two outcomes are possible. If the government imposes a price floor of S2 per cone when the equilibrium price is S3, we obtain the oulcome in panel (a) of Figure 4. In this case, because the equilibrium price is above the floor, the price floor is not binding. Market forces naturally move the economy to the equilibrium, and the price floor has no effect.

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