Price Ceiling or Price Floor: Does the Rule Create a Shortage or Surplus?
A binding ceiling pushes legal price below equilibrium. A binding floor pushes legal price above equilibrium.
Price ceiling
A maximum legal price becomes binding when it is set below market equilibrium, increasing quantity demanded relative to quantity supplied.
Price floor
A minimum legal price becomes binding when it is set above market equilibrium, increasing quantity supplied relative to quantity demanded.
Nonbinding controls
A ceiling above equilibrium or a floor below equilibrium may have little immediate market effect because the market price already satisfies the rule.
Exam strategy
Draw the equilibrium mentally, place the legal price relative to it, then compare quantity supplied and demanded.
The takeaway
Binding price ceiling tends to create shortage. Binding price floor tends to create surplus.
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FAQ
Does a binding price ceiling tend to cause shortage?
Yes.
Does a binding price floor tend to cause surplus?
Yes.
Can a price control be nonbinding?
Yes.