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Price CeilingA Price Ceiling is a government-imposed limit on how high a price can be charged on a product. Price ceilings are below the equilibrium price. Price ceilings are used to protect the consumer from certain conditions that could make necessities unattainable. However, used for a prolonged period of time, price ceilings cause many problems. A good historical example is rent control in New York (rent control is a price ceiling on rent). When soldiers were coming back from World War II and starting families (causing a large demand for appartments) stopped receiving pay (there was no longer a war), many could not deal with the jumping rent. The government put in price controls. However, now, it is almost impossible to find an apartment in New York for a reasonable price because appartments got too expensive to keep and landlords turned them to other uses, or just allowed the appartments to get dillapidated. Also, at the worst point in time, people had to look in the obituaries and when someone died many would scramble to get the apartment.
The price ceiling price is below the economic equilibrium. If it was above equilibrium, nothing would theoretically change, because the demand is being taken care of for a lower price. When the maximum price is bellow equilibrium (assuming supply and demand stay the same), a shortage is created, like in the apartment situation above.
So why are rent controls used? They are made with good intentions, a.k.a. deal with the immediate problem, and since politicians generally focus on the short run, price ceilings will most likely continue to be used.
Sources: Colander, Economics See Also: Price floor, Economic Equilibrium
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