This essay will critically discuss how price ceilings and floors could possibly lead to economic inefficiency causing surpluses or shortages in relation to graphs and the real world case study.
Firstly, price ceilings and price floors are basic aspects of our economy. Government enacted laws used to prevent suppliers from establishing prices of resources higher than supposed to be are known as price ceilings. Price floors are minimum pricing rates that can be charged for a particular good or service. Price controls such as these two are used to maintain affordable lifestyles and to protect consumers from suffering from unfair inflation. But however, if not executed correctly, price controls become completely ineffective.
In order for a price ceiling to be effective price ceilings must be set below the natural market equilibrium but this in return becomes a problem the outcome of that would result in either excess in demand or a shortage in supply (Taylor 2006). Producers will not produce as much at a lower pricing rate, while consumers will continue to demand more because of the good being made more affordable; demand will exceed the supply. But still if the demand curve is relatively elastic then the net effect to consumer surplus will be positive. Producers are definitely harmed, as their surplus is doubly hit with a reduction in the number of firms that are willing to take the lower pricing rates. Resulting shortages of goods or services can lead to consumers having to line up in order to receive the good or service, developments of black markets dealing with those scarce goods or services and also government rationing, which is what occurred with the energy crisis in America during the 70’s, when cars had to line up on the street in order to just get some government rationed amount of gasoline.

Figure 1: Price Ceiling Graph

Looking at figure 1, we can