The year is 1779 in Iceland. Light sources, such as oil lamps, are precious commodities (as harnessed electricity is not yet available). The government wants to intervene in the pricing of oil lamps so that its citizens do not pay outrageous amounts of money for lighting. The currency used in Iceland at the time is the rigsdaler. Consider the graph depicting Iceland’s hypothetical supply and demand for oil lamps. If Iceland’s governor chooses to set a price floor of 15 rigsdaler for an oil lamp, what will occur? The equilibrium price of an oil lamp will change. Nothing will change. There will be a surplus of oil lamps. There will be a shortage of oil lamps. If Iceland’s governor chooses to set a price ceiling of 40 rigsdaler for an oil lamp, what will occur? Nothing will change. There will be a surplus of oil lamps. The equilibrium price of an oil lamp will change. There will be a shortage of oil lamps. Price (rigsdaler) 45 40- Supply 35- Demand 30- 25- 20- 15- 10- 5- 0 40 60 80 100 120 Quantity of oil lamps (thousands) 140
The Correct Answer and Explanation is:
Correct Answers:
- If a price floor of 15 rigsdaler is set:
✅ Nothing will change. - If a price ceiling of 40 rigsdaler is set:
✅ Nothing will change.
Explanation
In economics, a price floor is the lowest legal price a commodity can be sold at, while a price ceiling is the highest legal price it can be sold at. Governments use these tools to protect consumers or producers, but their effects depend on where the floor or ceiling is placed relative to the market equilibrium price.
From the graph (as described), the equilibrium price — the price at which quantity supplied equals quantity demanded — appears to be around 30 rigsdaler. This is where the supply and demand curves intersect.
Scenario 1: Price floor of 15 rigsdaler
A price floor set below the equilibrium (15 < 30) is non-binding, meaning it has no effect on the market because the market naturally prices the product higher than the floor. Sellers are already charging more than 15 rigsdaler, and consumers are willing to pay that. As a result, the price floor is irrelevant, and nothing will change in terms of pricing or quantity.
Scenario 2: Price ceiling of 40 rigsdaler
A price ceiling set above the equilibrium (40 > 30) is also non-binding, meaning the market is already operating below this price. Sellers are not pricing oil lamps as high as 40 rigsdaler, so the ceiling doesn’t constrain them. Hence, it has no practical effect on the market. Prices and quantities remain the same, and again, nothing will change.
If instead the price floor had been set above equilibrium, or the ceiling below it, then we would see surpluses or shortages. But in both these cases, the interventions are too lenient to impact the functioning of the oil lamp market.
Thus, in both scenarios, market forces continue to operate freely, and no surplus, shortage, or price shift occurs.
