Final answer:
A price ceiling is designed to help consumers by setting a maximum legal price for a product, ensuring affordability but potentially causing shortages and deadweight loss in the economy. Price floors, conversely, aim to protect producers with a minimum legal price, transferring some consumer surplus to producers but also interrupting market equilibrium.
Step-by-step explanation:
The purpose of a price ceiling is to help consumers by establishing a legal maximum price for a product or service. This form of price control allows the government to intervene in the market to ensure that essential goods and services remain affordable to the public, especially for those in lower income brackets. While price ceilings are intended to protect consumers, they often have the side effect of creating shortages, as the quantity demanded exceeds the quantity supplied at the set price. This economic intervention can also lead to a deadweight loss in the economy, where some transactions that would have taken place in a free market are blocked, potentially decreasing the overall social surplus. Conversely, a price floor is designed to protect producers by setting a minimum legal price for their products or services, often to ensure they can cover their costs and make a reasonable profit. This can transfer some consumer surplus to producers and is the reason why price floors are favored by them. However, both price ceilings and price floors interrupt the natural equilibrium in a market and can lead to inefficiencies.