Price Ceiling

Price Ceiling

Introduction

Changes in prices of products are influenced by market players, it has been witnessed that buyer of certain commodity wishes to purchase the good at the lowest possible whereas sellers want the highest price, there is a conflict of interest between the two groups. In such a situation government intervenes in the market to determine the price, if buyers are able in lobbying then government decides to impose a legal maximum price at which the commodity can be sold which is known as price ceiling. However if sellers are successful in getting the highest price, in these circumstances government imposes a legal minimum on the price that is called price floor (Stonecash, 2011).

Price ceiling sets a maximum price that seller can charge for the good. It can be set either above the market equilibrium, that is where demand for the good equals its supply or below the market equilibrium price. However for price ceiling to be effective it should be set below the market equilibrium, is the price ceiling is above the equilibrium price then there will be no direct effect on the market forces. Government uses price ceiling as a measure of control for consumers where it considers that market equilibrium price is too high. Government has designed this regulation as a measure to protect the low income groups that are unable to afford the basic necessities of life. However price ceiling is not always beneficial for the society it results in numerous problems encounter by the market for instance deadweight loss, black market, search time and fees and, so on (Mankiw, 2011).

Discussion

Government officials sometimes set the price below equilibrium by setting price ceiling which can also be defined as maximum price imposed by the government. Often this is done to protect the consumers from paying higher price for certain commodity, for instance rising prices for housing rentals was seen as a concern for government thus it decided to intervene in the market by imposing maximum price or rental ceiling (Stonecash, 2011)

Price ceiling may be set above or under the equilibrium price however for price ceiling to be effective government needs to set it below the equilibrium price as it creates a shortage of goods in the market, demand for the good exceeds it supply, in such a situation price ceiling is binding constraint on the market. Since the demand and supply forces will increase the price towards equilibrium but it cannot rise more than price ceiling. There will be a shortage of goods in that market as demands exceeds supply at price ceiling set below equilibrium. Moreover is the maximum price imposed was above the equilibrium then price ceiling would have been ineffective or non-binding as market forces naturally move the economy to equilibrium. Both the situations can be illustrated in the diagram below (www.college-cram.com).

Source: www.college-cram.com

Advantages and Disadvantages of Price Ceiling

Governments intervene in the market for the benefit of the society and the market. It wants to protect the interest of both consumers ...