Price ceiling

A price ceiling is a cap on the highest price that can be charged. This ceiling is usually imposed by a government entity in order to make essential goods and services available to low-income individuals. For example, a city government could impose a price ceiling on the rents charged on residential property within its boundaries. The intent behind the imposition of a ceiling is to keep prices affordable for low-income consumers.

A common side effect of a price ceiling is that the level of supply falls, so that there is a shortage of the goods or services that are subject to the ceiling. This creates an artificial imbalance between supply and demand, which may eventually become so severe that the government imposing the ceiling finds it necessary to raise the allowable maximum price.

Another side effect is that a black market develops, where consumers willing to pay more money than the imposed price will illegally obtain the desired goods or services at a higher price. When the providers of the price-controlled items find that they can earn substantially more on the black market, they will be even less inclined to sell at the imposed price ceiling, which creates a greater supply and demand imbalance.

Yet another outcome of a price ceiling is that sellers will attempt to circumvent the maximum price by charging additional fees. For example, they could charge an administrative fee, a handling fee, or a fuel surcharge. In all of these cases, the intent is to increase their total revenue while still theoretically staying within the legal limits of the law. This approach is less blatantly illegal than selling on the black market.

A final outcome of an imposed price ceiling is that sellers attempt to retain their profits by reducing the quality of their goods. For example, a renter in a rent-controlled area could minimize the amount spent on maintenance of the property, while the seller of baked goods could include lower-quality flour in the products sold.

In short, a price ceiling tends to impose artificial constraints on the market, which both buyers and sellers may work to avoid.