A price ceiling is a price limit set by the government to control the pricing of a product within a market. Governments set price ceilings to regulate prices so as to protect consumers from overpricing or exploitation by the market especially on the prices of goods. Price ceiling aims at making products affordable and attainable by consumers within acceptable prices.
Is a price ceiling set above or below the market price?
Price ceiling is usually set below the natural market equilibrium price. This is because; there is no significant impact when price ceilings are set below the market price. However, when a price ceiling is set above the natural market equilibrium price, there stands a possibility of an excess supply or surplus. Some producers may not foresee the trouble of producing large quantities of products because consumers may not buy much of these products at high prices. However, when price ceilings are set below the market price, there is a possibility of excess demand and shortage of supply because consumers will be inclined to consume more at lower prices.
Example of a price ceiling – Rent control
Rent control is an example of price ceiling that the government uses to control rental charges to ensure housing is made affordable to low-income earners. In the short run, the supply for housing is inelastic and this is because the quantity of rentals supplied is constant and those that are being constructed are being constructed merely because of sunken prices. This is an advantage to the tenants. Another advantage is that during inflation, when product prices are high, tenants are still able to afford housing because price fluctuations are controlled. The disadvantage of this price ceiling is evident in the long run. People build rentals with the aim of making profits by charging profitable rents. However, in the lone run, this price ceiling on rents decreases the supply of rentals. This is because; suppliers are not willing to spend money to build more rentals. Another disadvantage of price ceiling as far as rent control is concerned is that, the quality of houses supplied may be of compromised quality because of little incentive to invest in quality (Melanie, 2014). Order Unique Answer Now