A quantity ceiling is a ceiling imposed by a regulatory body on the quantity of a good that can be produced. The main reason why quantity ceilings are problematic to impose is that there are a large number of producers and each of them has considerable freedom in how much to produce. There are two broad ways that quantity ceilings can be successfully imposed.
Quantity ceiling by controlling a critical factor of production
One way of imposing a quantity ceiling is to control the quantity of a critical raw material needed to produce the good. For instance, if government controls the supply of crude petroleum oil to the economy, it can use this to impose a quantity ceiling on various products (such as automobile fuels) produced from crude oil. Similarly, a city can use its control over land to impose zoning regulations that impose a quantity ceiling on the number of housing units that can be built on the hand.
Control of a critical factor of production can thus be used to impose a quantity ceiling even if the exact identity of all producers is not known beforehand.
Quantity ceiling based on one-on-one regulation of individual producers
In an industry with high barriers to entry and a limited set of producers clearly identified by the government, the government may set explicit quotas on each of the incumbents for the maximum that they are allowed to produce. The sum of the quotas across all the producers is the market's quantity ceiling.
Binding versus non-binding
There are two types of quantity ceilings:
- Non-binding quantity ceiling is a quantity ceiling that is higher than the equilibrium quantity traded
- Binding quantity ceiling is a quantity ceiling that is lower than the equilibrium quantity traded