What is a price ceiling?

A price ceiling is defined as a government-imposed limit on how high a price can be charged for a product. This regulatory measure aims to protect consumers from excessively high prices, especially during times of economic distress or for essential goods and services. For instance, governments often impose price ceilings on staples like bread or gasoline to ensure that they remain affordable for the general population.

When a price ceiling is set below the natural market equilibrium price, it can lead to a situation where the quantity demanded exceeds the quantity supplied, resulting in shortages. While the intention behind a price ceiling is to make essential goods accessible, it can also create unintended consequences like reduced availability of those goods, black markets, or decreased incentives for producers.

Understanding price ceilings is crucial in economics, as they reflect government interventions meant to address issues of affordability and access, yet they also highlight the complexities of market dynamics where price controls can lead to shortages and inefficiencies.