Price Floor Creates Shortage

Q1 answer option a a a binding price ceiling that creates a shortage the price ceiling is a maximum price a seller charge and the price is effective if it s below the equilibrium the market is in equ view the full answer.

Price floor creates shortage.

Previous question next question. A binding price floor occurs when the government sets a required price on a good or goods at a price above equilibrium. A price floor may lead to market failure if the market is not able to allocate scarce resources in an efficient manner. But if price ceiling is set below the existing market price the market undergoes problem of shortage.

Because the government requires that prices not drop below this price that. In this case there is no effect on anything and. A government law that makes it illegal to charger lower than the specified price. When price ceiling is set below the market price producers will begin to slow or stop their production process causing less supply of commodity in the market.

Creates a black market. A price floor is only binding when the equilibrium price is below the price floor. First of all the price floor has raised the price above what it was at equilibrium so the demanders consumers aren t willing to buy as much quantity. Ceiling and the quantity demanded exceeds the quantity supplied creating a shortage of goods.

Further the effect of mandating a higher price transfers some of the consumer surplus to producer surplus while creating a deadweight loss as the price moves upward from the equilibrium price. A price ceiling below the market price creates a shortage causing consumers to compete vigorously for the limited supply limited because the quantity supplied declines with price. The demanders will purchase the quantity where the quantity demanded is equal to the price floor or where the demand curve intersects the price floor line. If price ceiling is set above the existing market price there is no direct effect.

Two things can happen when a price floor is implemented.