Price ceilings and price floors that are binding

Question

Quizplus · Accepted Answer

When price ceilings and price floors are binding, they prevent the market from reaching equilibrium by preventing the price from adjusting to the market-clearing price. This results in either a surplus or a shortage of the good. For example, a price ceiling that is below the market equilibrium price will create a shortage of the good because suppliers will be unwilling to produce as much as the demand requires at the artificially low price. Similarly, a price floor that is above the market equilibrium will create a surplus of the good because suppliers will produce more than the demand requires at the artificially high price.

Price Ceilings and Price Floors That Are Binding