Price Ceiling

Price ceiling is defined as a legal maximum on the price of a good or service. Setting a price higher than the legal maximum is illegal.

When this is imposed on a competitive market, a shortage of the good or service can arise. This is because the price is set below the market equilibrium price, causing the quantity demanded to be higher than the quantity supplied. The sellers of the good must ration the shortage of goods or service among the potential buyers.

Examples are commonly seen in the housing market, especially in the area of rent control.

• In the example of rent control, a local government may impose a price-ceiling on apartment rents. Consequently, the tenants are forced to charge for rent at a price that cannot exceed the legal maximum. This can be problematic in several ways. A possible increase in demand can cause a shortage of housing. Furthermore, tenants may consider reducing quality by failing to maintain existing housing units.

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