Price ceiling

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Definition

A price ceiling is an upper limit placed by the government or a regulatory authority with government sanction on the price (per unit) of a commodity.

A price ceiling is a form of price control. The other form of price control is a minimum price.

Effects

Price ceilings have no effect when they are above the market-clearing price

A price ceiling that is set above the market price of the commodity has no effect. Such price ceilings may be put in place to prevent price gouging in the even of an emergency or to prevent rapid fluctuations in prices due to other unforeseen circunstances.

Price ceilings create excess demand when they are below the market-clearing price

If the price ceiling is below the market price, demand for the good exceeds supply for the good, resulting in a situation of scarcity or excess demand. The market usually handles such situations either by creating a black market or through non-price competition, both of which are prone to inefficiencies.

Related notions

  • Maximum retail price is an upper limit that the producer or wholesale distributor puts on the price at which retailers can sell the commodity to customers. Maximum retail prices do not usually have the inefficiencies associated with price ceilings, because producers of the goods can vary maximum retail prices according to demand trends over the somewhat longer term.