PRICE CEILINGS & PRICE FLOORS
PRICE CEILINGS
A price ceiling is a price control that limits how high a price can be charged
for a good or service.
LEARNING OBJECTIVE
Define price ceilings.
KEY POINTS
• For a price ceiling to be effective, it must be less than the free-market
equilibrium price.
• The purpose of a price ceiling is to protect consumers of a certain good
or service. By establishing a maximum price, a government wants to
ensure the good is affordable for as many consumers as possible.
• Rent control is an example of a price ceiling.
KEY TERMS
Free-market equilibrium price
, The price established through competition such that the amount of goods or
services sought by buyers is equal to the amount of goods or services
produced by sellers
Price ceiling
An artificially set maximum price in a market.
A price ceiling is a price control that limits the maximum price that can be
charged for a product or service. Generally ceilings are set by governments,
although groups that manage exchanges can set c eilings as well. The purpose
of a price ceiling is to protect consumers of a certain good or service. By
establishing a minimum price, a government wants to ensure the good is
affordable for as many consumers as possible .
US POSTER FOR PRICE CEILINGS
Governments often impose price ceilings in times of war to ensure goods are
available to as many people as possible.
An example of a price ceiling is rent control. These regulations require a
more gradual increase in rent prices than what the market may demand . This
regulation is meant to protect current tenants. Without rent control, there
could be situations where the demand for housing in an area could cause rent
prices to make a substantial jump. Unable to afford the new, significantly
higher rent, a majority of the neighborhood's tenants may be forced to move
out of the neighborhood. Rent controls limit the possibility of tenant
displacement by minimizing the amount by which rent can be increased.
By definition, however, price ceilings disrupt the market. B y setting a
maximum price, any market in which the equilibrium price is above the price
ceiling is inefficient. There will be excess demand because the price cannot
increase enough to clear the excess.
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PRICE CEILINGS
A price ceiling is a price control that limits how high a price can be charged
for a good or service.
LEARNING OBJECTIVE
Define price ceilings.
KEY POINTS
• For a price ceiling to be effective, it must be less than the free-market
equilibrium price.
• The purpose of a price ceiling is to protect consumers of a certain good
or service. By establishing a maximum price, a government wants to
ensure the good is affordable for as many consumers as possible.
• Rent control is an example of a price ceiling.
KEY TERMS
Free-market equilibrium price
, The price established through competition such that the amount of goods or
services sought by buyers is equal to the amount of goods or services
produced by sellers
Price ceiling
An artificially set maximum price in a market.
A price ceiling is a price control that limits the maximum price that can be
charged for a product or service. Generally ceilings are set by governments,
although groups that manage exchanges can set c eilings as well. The purpose
of a price ceiling is to protect consumers of a certain good or service. By
establishing a minimum price, a government wants to ensure the good is
affordable for as many consumers as possible .
US POSTER FOR PRICE CEILINGS
Governments often impose price ceilings in times of war to ensure goods are
available to as many people as possible.
An example of a price ceiling is rent control. These regulations require a
more gradual increase in rent prices than what the market may demand . This
regulation is meant to protect current tenants. Without rent control, there
could be situations where the demand for housing in an area could cause rent
prices to make a substantial jump. Unable to afford the new, significantly
higher rent, a majority of the neighborhood's tenants may be forced to move
out of the neighborhood. Rent controls limit the possibility of tenant
displacement by minimizing the amount by which rent can be increased.
By definition, however, price ceilings disrupt the market. B y setting a
maximum price, any market in which the equilibrium price is above the price
ceiling is inefficient. There will be excess demand because the price cannot
increase enough to clear the excess.
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