Price ceiling

A price ceiling is a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Such conditions can occur during periods of high inflation or in monopolistic markets. In spite of these goals, a price ceiling can cause problems if imposed for a long period without controlled rationing, and can lead to shortages. Furthermore, price ceilings can lead to serious problems if a government sets unrealistic prices. In an unregulated market economy price ceilings do not exist.

Rent control is a price ceiling on rent. When soldiers returned from World War II and started families (which increased demand for apartments), but stopped receiving military pay, many could not deal with the jumping rent. The government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none were left for late-comers. Price ceilings create shortages when producers are allowed to abdicate market share or go unsubsidized.

Definition: Price ceiling is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. It has been found that higher price ceilings are ineffective in the housing market.

Description: Government imposes a price ceiling to control the maximum prices that can be charged by suppliers for the commodity. This is done to make commodities affordable to the general public. However, prolonged application of a price ceiling can lead to black marketing and unrest in the supply side.

For example: Let's consider the house-rent market. Here in the given graph, a price of $9000 has been determined as the equilibrium price with the quantity at 30 homes. Now, the government determines a price ceiling of $6000. At this rate there is a shortage (demand for 40 houses, but supply is for only 20 houses). In the long run, the extra 20 people will try to get a house on rent, which will eventually give rise to black market and higher rents.

According to professors Niko Määttänen and Ari Hyytinen, price ceilings on Helsinki City Hitas apartments are economically highly inefficient. They cause queuing, and discriminate against the handicapped, single parents, elderly, and others not able to queue for days. They cause inefficient allocation, as apartments are not bought by those willing to pay the most for them—and those who get an apartment are unwilling to leave it, even when their family or work situation changes, since they can't sell it at what they feel the market price should be. These inefficiencies increase apartment shortage and raise the market price of other apartments.

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