What are Price Controls
Price controls are government-enforced maximum or minimum prices set above or below the equilibrium price for goods or services within a market. Price minimums, known as price floors, are enforced to ensure that producers receive a stable income from produce. These are commonly used for fruit and veg products to ensure farmers and workers receive fair wages.
How do Price Floors Affect Market Efficiency?
As shown by the model above, price floors are set above the equilibrium price. This means that prices are increased which reduces the quantity demanded of the product but increases producers willingness to supply. Therefore, price floors produce surpluses and decrease the size of the market due to the reduced demand from consumers to purchase the same goods for a higher price. Due to the increased prices, illegal markets may form as a method of producing goods for lower production costs and selling them below the price floor set minimum.
Furthermore, as the price is set above the equilibrium, deadweight loss is produced and the market efficiency decreases. This is shown as producer surplus increases as they receive higher prices, however, consumer surplus decreases as a result.
Put into Bullet Point Form:
It creates a surplus
It produces deadweight-loss (shown as DWL on the model.)
It reduces market efficiency as consumer surplus decreases.
Producer surplus increases, however, due to the surplus goods will go to waste due to reduced demand.
Illegal markets may form to exploit production costs to sell goods below minimum price.