Price Ceiling and Price Floor Research Paper Example | Topics and Well Written Essays - 1000 words

Price Ceiling and Price Floor - Research Paper Example Defined in the simplest of terms, price controls can be defined as the definition of a certain maximum or minimum level of the prices by the Government at which a good will be available in the market. The two most basic level of price control mechanisms undertaken by the Government are Price Ceiling and Price Floor. The Price Ceiling is the maximum price at which a good can be sold in the market whereas Price Floor is the minimum price at which the good will be sold in the market. While price Ceiling is generally meant to save consumer interest, the price floor is intended towards saving the interest of the supplier. Price Ceilings can be categorized into two types: Binding Price ceilings are the one which is at a level lower than the equilibrium price and hence has a significant impact on the market equilibrium. Non-binding price ceilings are set at a level higher than the equilibrium level. Examples of price ceiling include setting up rent control in New York, while the setting of minimum wages is an example of a price floor. Price floors are often imposed during crises like wars, droughts or natural disasters. Price floors are generally set for agricultural products to save the interest of the farmers. Indonesia, where more than 20% of the population is below the poverty line, Government takes active participation in controlling the prices. In order to curb inflation, the Government of Indonesia has time and again imposed control on the price of rising. The price control is also aimed at helping farmers. Prior to this, the Government had imposed price controls on cement because of the strategic nature of the industry. The Government set a maximum retail price at which cement could be sold and allocated production and distribution quotas amongst all the players.