Price Ceiling

What Is Price Ceiling?

A price ceiling is a government-imposed legal maximum on the price sellers may charge for a good or service. It is meant to keep goods affordable, but its market effect depends on where it is set. A price ceiling is binding only when set below the equilibrium price; there, the quantity demanded exceeds the quantity supplied and a persistent shortage results. Set above the equilibrium price, a ceiling is non-binding and has no effect on the market outcome, because the market already clears below the cap. The standard textbook example of a price ceiling is rent control on apartments, which caps rents below the market-clearing level.

Why It Matters

Price ceilings are a favorite policy example because they show how good intentions can backfire. By holding a price below equilibrium, a binding ceiling guarantees a shortage: at the capped price, more buyers want the good than sellers will provide. Rent control illustrates the pattern, since capped rents leave apartment-seekers unable to find units, and landlords have little incentive to build or maintain housing. Ceilings also create deadweight loss, because mutually beneficial trades that would have happened at the equilibrium price no longer occur. Economists use price ceilings to teach that suppressing a price does not suppress scarcity; it merely changes how the good is rationed, often through queues, waiting lists, or reduced quality.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is a price ceiling?
  A government-imposed legal maximum on the price that may be charged for a good
• A price ceiling is binding only when it is set where relative to equilibrium, and what does it cause?
  Below the equilibrium price, causing a persistent shortage
• Which policy is the standard textbook example of a price ceiling?
  Rent control on apartments