Ice government regulation

To see how price controls affect market outcomes, let’s look once again at the market
for ice cream. As we saw in Chapter 4, if ice cream is sold in a competitive market
free of government regulation, the price of ice cream adjusts to balance supply
and demand: At the equilibrium price, the quantity of ice cream that buyers want
to buy exactly equals the quantity that sellers want to sell. To be concrete, suppose
the equilibrium price is $3 per cone.
Not everyone may be happy with the outcome of this free-market process.
Let’s say the American Association of Ice Cream Eaters complains that the $3 price
is too high for everyone to enjoy a cone a day (their recommended diet). Meanwhile,
the National Organization of Ice Cream Makers complains that the $3
price—the result of “cutthroat competition”—is depressing the incomes of its
members. Each of these groups lobbies the government to pass laws that alter the
market outcome by directly controlling prices.
Of course, because buyers of any good always want a lower price while sellers
want a higher price, the interests of the two groups conflict. If the Ice Cream Eaters
are successful in their lobbying, the government imposes a legal maximum on the
price at which ice cream can be sold. Because the price is not allowed to rise above
this level, the legislated maximum is called a price ceiling. By contrast, if the Ice
Cream Makers are successful, the government imposes a legal minimum on the
price. Because the price cannot fall below this level, the legislated minimum is
called a price floor. Let us consider the effects of these policies in turn.