Final answer:
A price ceiling sets a maximum price for electricity, and a price floor sets a minimum, neither change demand or supply but limit market prices. Price ceilings are favored by consumers while price floors are favored by producers, both create deadweight loss. Efficient market outcomes are hindered by these controls, which can be resolved by allowing prices to reach their equilibrium.
Step-by-step explanation:
In the market for electricity, a price ceiling is the maximum price set by law that can be charged for electric power, while a price floor is the minimum price. Neither of these mechanisms change the demand or supply itself, but they do restrict how the market can respond to changes in demand or supply. For instance, if a price ceiling is set below the market equilibrium price for electricity, there can be a shortage as the quantity demanded exceeds the quantity that producers are willing to supply at that price cap.
Price controls, such as a price ceiling for rent, transfer some producer surplus to consumers and explain why consumers might support them. On the other hand, a price floor, such as agricultural price supports, transfers consumer surplus to producers, which shows why producers might favor them. However, both price ceilings and floors can prevent market transactions that would otherwise occur, thus creating deadweight loss and leading to inefficiency. Removing such barriers allows the prices and quantities to adjust to their equilibrium levels, increasing the economy's social surplus.
A price floor below the equilibrium level has no effect because the market price has room to adjust upwards to the equilibrium without constraint. However, a price ceiling or a price floor that is above or below the equilibrium can lead to an inefficient market outcome, preventing the market from clearing and leading to either a surplus or shortage.