Limit beyond which a cost
will not be allowed to rise.
Price floors and price ceilings are both examples
of price controls. Price controls are set by the government
for a variety of reasons. Typically, price controls won't go into effect unless there is an emergency
or some other reason for the government to step in and tip the hand of the free market
Price ceilings are price controls put in place by the government when they believe a good or service is being sold for too high of a price.
They often result in localized supply
shortages if the ceiling is set too low. They drive
because, by definition, they make a good or service cheaper than the market
would have otherwise set the rate
at. A price ceiling cannot alter the supply curve
in a positive way, it always creates shortages, although sometimes supply is elastic
enough to absorb
Price floors are price controls put in place by the government when a good or service is selling for too low of a price. Price floors can cause demand shortages, and excess supply. They drive down demand by raising prices higher than they would normally be set by the producer. This has the effect of subsidizing the producer and increasing their incentive to make a particular good or deliver a particular service, but it doesn't alter the demand curve positively.