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Which of the following best describes the effect of binding price ceilings and binding price floors in a competitive market?
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5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Price Ceilings, Price Floors, and Black Markets
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For a price ceiling to be a binding constraint on the market, the government must set it ________.
A
above the equilibrium price
B
below the equilibrium price
C
equal to the equilibrium price
D
at any price level
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Understand what a price ceiling is: it is a legal maximum price that sellers can charge for a good or service.
Recall the concept of equilibrium price, which is the price where quantity demanded equals quantity supplied in a market.
Recognize that for a price ceiling to be binding, it must actually restrict the market price from reaching equilibrium.
Analyze the effect of setting the price ceiling above the equilibrium price: since the market price is already lower, the ceiling does not constrain the price.
Conclude that the price ceiling must be set below the equilibrium price to be binding, causing a shortage by increasing quantity demanded and decreasing quantity supplied.
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