Price and Quantity controls: Price Ceiling

Governments can decide that market prices are unjust, markets may not allocate goods and services to those in need. When this is the case, governments may put price and quantity controls on the market. In this post we will explore the practice of price ceiling.

A price ceiling is a maximum price that both producers and consumers are not allowed to exceed. This practice is used when a government thinks that a market price is excessive.

In a competitive market , if a government decides to impose a binding price ceiling (i.e: the new imposed price is smaller than the original equilibrium price), it results in the quantity demanded being greater than the quantity supplied. The market is unable to provide a good or service to every consumer willing to buy the product at the new given price, this results in a shortage. The shortage is represented by the difference between the quantity demanded and the quantity supplied at the new imposed price in the market.

Real life examples of price ceilings can be found in rent controls in California or in New York City. In India, a price ceiling was imposed on the ride sharing app Uber.

Example:

The government decides to put in place rent control in the real estate market. Assuming that this market is competitive, then the new binding price (PC) causes the quantity demanded to be greater than the quantity supplied. This results in a shortage in the market. The amount of people who are able to get a place to rent is lower (QS) then the quantity demanded (QD). Furthermore, the amount of real-estates supplied in the market is now lower than it was before the price ceiling (QS<QE).

Reference: Mayer,David. AP Microeconomics Crash Course. Research & Education Association (2014). p 63.

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