Price ceilings and price floors

In OpenStax's rent-control example, a $500 cap after demand rises leaves 19,000 households looking for 15,000 flats.

Why governments set prices

Markets do not always give results people like. When the price of a necessity jumps, renters, drivers or farmers may ask politicians to hold it down or prop it up. Laws that do this are price controls. A price ceiling is a legal maximum: the price may not rise above it. A price floor is a legal minimum: the price may not fall below it. The demand and supply model predicts what happens next, and OpenStax's main conclusion is that the laws of demand and supply keep working even when a law tries to override the price.

Rent control: a ceiling

In OpenStax's rental market the original curves cross at $500 a month and 15,000 flats. Then incomes rise or the town becomes popular, and demand shifts to D1. Left alone, the rent would rise to $600 and the number of flats rented would grow to 17,000, because the higher rent draws more flats onto the market. Suppose instead the city caps rents at the old $500. Landlords still offer only 15,000 flats at that rent, but 19,000 households now want one. The result is a shortage of 4,000 flats.

Notice the irony OpenStax points out. The ceiling was meant to help renters, yet fewer flats are rented under it (15,000) than would be at the market rent of $600 (17,000). There are other side effects. Some landlords turn flats into owner-occupied homes, and those who keep renting tend to spend less on repairs, heating and hot water. Some renters gain a cheap flat; others cannot find one at all.

A ceiling only matters if it is below the equilibrium price. Move the ceiling in the model to $650: the readout says "not binding", because the market rent of $600 is already under it. A ceiling above the market price is legal decoration.

Price floors: farm supports and minimum wages

A floor works the other way. Set above the equilibrium price, it raises the quantity supplied and lowers the quantity demanded, leaving a surplus. Many countries support farm prices this way, and the government then has to buy up the extra crop or pay others to take it. OpenStax reports that under the Common Agricultural Policy reform effective in 2019 the European Union was set to spend about 58 billion euros a year, roughly 36% of the EU budget, on price supports for its farmers.

The best-known floor is the minimum wage, a lowest legal price for an hour of work. In the United States the federal minimum wage has been $7.25 an hour since 24 July 2009, although many states set higher rates. In Korea the minimum wage for 2026 is 10,320 won an hour, set by the Ministry of Employment and Labor for every type of business. Whether a minimum wage creates a surplus of workers, and how large it is, depends on where the wage sits relative to the market wage and on how employers respond; economists still argue about the size of the effect, so treat the simple diagram as a starting point.