Price floor on the ice-cream market

When the government imposes a price floor on the ice-cream market, two outcomes
are possible. If the government imposes a price floor of $2 per cone when
the equilibrium price is $3, we obtain the outcome in panel (a) of Figure 6-4. In this
case, because the equilibrium price is above the floor, the price floor is not binding.
Market forces naturally move the economy to the equilibrium, and the price floor
has no effect.
Panel (b) of Figure 6-4 shows what happens when the government imposes a
price floor of $4 per cone. In this case, because the equilibrium price of $3 is below
the floor, the price floor is a binding constraint on the market. The forces of supply
and demand tend to move the price toward the equilibrium price, but when the
market price hits the floor, it can fall no further. The market price equals the price
floor. At this floor, the quantity of ice cream supplied (120 cones) exceeds the quantity
demanded (80 cones). Some people who want to sell ice cream at the going
price are unable to. Thus, a binding price floor causes a surplus.
Just as price ceilings and shortages can lead to undesirable rationing mechanisms,
so can price floors and surpluses. In the case of a price floor, some sellers
are unable to sell all they want at the market price. The sellers who appeal to the
personal biases of the buyers, perhaps due to racial or familial ties, are better able
to sell their goods than those who do not. By contrast, in a free market, the price
serves as the rationing mechanism, and sellers can sell all they want at the equilibrium
price.