Price Ceiling and Price Floor Mechanisms in Economics

Running head: Economics: Principles, Models and Policies
Economics: Principles, Models and Policies
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Economics: Principles, Models and Policies 1
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Conclusion.......................................................................................................................................8
Reference List................................................................................................................................10

Economics: Principles, Models and Policies 2
Introduction
This specific assignment will emphasize over the two price control mechanisms price
floor and price ceiling. The price ceiling is used to lower the price level prevailing in the market
while the price floor is used to raise the price level. In the context of price ceiling the
organizations will not be able to raise the price level above the ceiling while the price level could
not be decreased in the context of price floors. In addition to this it will also discuss about the
appropriateness of the minimum wage law of the Australian government and emphasize whether
this should be practiced further or not.
Discussion
Market failure is said to occur when the market demand is not equated with the market
supply. This gives rise to inefficient market outcomes which can be corrected by the government
through changing the incentive structure of effectively allocating the resources or through the
implementation of price ceiling or price floors. The more efficient interpretation of market
failure would be a situation where the economic agents are not properly incentivized for driving
the economy towards the equilibrium (Perkis et al., 2016). A market failure adversely affects the
economy because of the non-efficient allocation of the resources available. In the words of Plott
et al., (2018), the opportunity cost associated with the resources used in creating the product or
the social cost of manufacturing the goods or services if not minimized and this leads to resource
wastage.
In certain cases the government intervene into the market to control the prevailing price
level in the market and implements a few strategies like price floors and price ceilings. The first
instance of government intervening the market is the imposition of a price ceiling. A price

Price of Gasoline
Quantity of Gasoline10
2.00
1.50
5
Supply of Gasoline
Demand for Gasoline
0
Economics: Principles, Models and Policies 3
ceiling is said to take place when the price is deliberately set at a level lower than that of the
equilibrium price level and is not allowed to increase further (Perkis et al., 2016). There are
several instances of price ceilings which can be cited as an example. In most of the cases the
imposition of price ceiling involves the government intervention. Such as in many cities there are
certain rent control measures. The implementation of rent control signifies that the maximum
amount of rest that can be charged is set by a government agency. It is also necessary to mention
that this maximum rent is allowed to increase a certain percentage every year in order to cope
with the prevailing inflation although it will be so designed that the rent remains below the
equilibrium level (Vasigh and Fleming, 2016). Another example of price ceiling can be observed
in the context of the pricing of gasoline. During 1973 through 1981 there was a price ceiling
imposed on the price level of gasoline, the law has set a maximum price for gasoline any owner
of the gas station charging price more than that would be held guilty for business malpractice and
violating the law. The concept of price ceiling could be explained easily with the help of the
following diagram.