Price controls

Price controls are a form of government intervention where either a maximum or minimum price is imposed on a good or service, called a price ceiling and price floor, respectively.

Price ceiling
A price ceiling is designed to prevent a price from rising above a certain level, meaning a ceiling is always set lower than equilibrium price. Thus, the price ceiling benefits consumers by artificially lowering the cost of goods.

At the same time, producers are disadvantaged, being forced to sell at a lower price. Some will withdraw from the market if it is supply elastic enough, causing a shortage. The government can impose a price ceiling and avoid a shortage by providing a subsidy. In the diagram, the subsidy would have to cover MB - P*.

The consequences of a price ceiling also include the establishment of parallel markets, where individuals with early access to the market will buy inordinate quantities of the highly desirable good and resell it at an increased price

Rent control
The classic example of rent control is used to demonstrate the consequences of a price ceiling. It is a price ceiling on the price of rental apartments, designed to benefit low income families. On the supply side, however, the lower price of rental buildings means developers are less likely to construct more of them and some may convert rental apartments to condominiums to sell. This causes a shortage of affordable housing in the long run. In addition, since profit margins are decreased by the price floor, landlords will likely reduce the frequency of renovations, causing the buildings to deteriorate at a faster rate.

Price floor
Being the opposite of a price ceiling, a price floor is designed to prevent a price from dropping below a certain level, meaning a floor is always set higher than equilibrium price. Thus, the price floor benefits producers by artificially increasing the cost of goods.

Price floors disadvantage consumers, who are forced to buy at a higher price if the good is demand inelastic. Some will even switch to substitutes, meaning price floors must be carefully implemented if the supplier is actually to benefit from it. Generally, they are applied to demand inelastic markets like food. Even so, there will usually be a shortage as a result of an excess of producers. Depending on the nature of the market, the surplus might be exported, donated, or destroyed.