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Glossary
Equilibrium Barriers: Price Controls

Markets tend toward equilibrium unless there are barriers, called price controls, that make it impossible to move to equilibrium. There are two types of price controls: price floors and price ceilings.

A price floor is a legal barrier that holds a price above the equilibrium price. It is called a floor because it sets the lowest legal price that can be charged for a good or service. To be effective, a price floor must be above the equilibrium price.

Price Floor

Minimum wage laws passed by state and federal governments are one example of a price floor. Remember that a wage is a price in a labor market. So, a minimum wage is an attempt to hold wages above the equilibrium price to benefit workers.

The opposite price control is a price ceiling. A price ceiling is a legal barrier that holds a price below the equilibrium price. It is called a ceiling because it sets the highest legal price that can be charged for a good or service. To be effective, a price ceiling must be set below the equilibrium price.

Price Floor

One example of a price ceiling is rent control, where local governments attempt to help those in poverty by requiring landlords to charge rent at a level below the equilibrium price.

Of course, both price ceilings and price floors are policies enacted to benefit a particular segment of society. Both can, however, have negative effects. Price floors cause surpluses in the market. In the case of the minimum wage, a surplus means that workers will seek to supply a greater number of labor hours than employers will demand, resulting in an increase in unemployment.

Price ceilings cause shortages in the market. In the case of rent-controlled apartments, a shortage means there are fewer apartments available than the number of apartments people want, resulting in some people having to share housing or move farther away.

Economists generally prefer to allow prices to settle at equilibrium and choose other methods, such as subsidies, to help people who need extra income or affordable housing.

Let's see how price control barriers appear on a graph. 

Price control Price Market condition Graph

Price ceiling
(Example: Rent control)

Price below equilibrium

Shortage
Qd > Qs
(Example: Shortage of apartments)

Shortage Graph

Price floor
(Example: Minimum wage)

Price above equilibrium

Surplus
Qs > Qd
(Example: Surplus of labor)

Surplus Graph