In all countries, government intervenes in market pricing with an apparent motive to maximize its efficiency. Government intervention results in imposition of:

· Price Floor

· Price Ceiling

Effects of Price Floor (Minimum Price) on consumers and producers

Sometimes government has to raise prices above the market clearing level or equilibrium point.

Effect on Consumers: Government set a minimum wage rate to stop it from dropping to a minimum level. Without governmental intervention the wage rate would be established at the equilibrium level. At that wage the quantity of labor demanded (jobs) is equal to the quantity of labor supplied (labor force) and there is no unemployment. If the government establishes a wage rate above the equilibrium level then the quantity of labor demanded will be less and the quantity of labor supplied will be more than at the equilibrium and thus there will be unemployment. For those who have a job at the controlled wage the government intervention seems a good thing. For those who lose their job as a result of the government intervention the controlled wage is a bad thing, but even these people may publicly favor the government intervention because they expect that they will eventually find a job at the controlled wage.

Consumer does not the enjoy price flooring, because he has to spend more than the equilibrium point.

Effect on Producers:

Particularly speaking in context of Pakistan, minimum selling price is set for the crops so that it benefits directly to farmer and encourage him to produce more. Falling prices have caused the profits of farmers to fall. The market is sending the farmer a signal. It is telling him or her to leave farming and do something else. What is the farmer's sin? It is not that the farmer has been inefficient or has made bad business decisions. The problem is that the farmer is too good. Farmers are able to produce more food than consumers want to buy at prices that will allow the farmer to make a profit. To farmers and others, this seems unfair.

Another prevalent effect of price floor is in the form of import duties. Government imposes duties to encourage the use of local goods in a market by establishing a minimum selling price to that imported good. Selling below that minimum price is illegal. That gives extra price advantage to local producer and enables him to compete against foreign products. Producers enjoy high profitability and market share that results in producer surplus.Supply surplus is the result of price floor.

Effects of Price Ceiling (Maximum Price) on consumers and producers

Government often set maximum price below equilibrium level with a motive that all the buyers can get benefit of certain good or services by purchasing them at controlled price.

Effects on consumer: Consumer will try to get more of the commodity as it is set below the equilibrium price and hence will result in market shortage. Governments normally impose price ceiling on commodity items like sugar, flour, poultry, meat etc. The result of price ceiling is consumer surplus.

However, due to shortage not every one can enjoy the commodity or good at controlled price so price ceiling is good for the person who has been benefited by this price ceiling, on the contrary it is bad for those who could not get the product due to shortage.

Effect on Producers: With a reduced price producer are not encouraged to produce more. So there is a shortage. Price ceilings provide a gain for buyers and a loss for sellers. Sellers would like to avoid the loss if they can. One way to do so is called a black market. In this case, the sellers illegally raise the price and hope to get away with it. So, for example, tickets to popular events are sold by scalpers at high prices.