What is a Price Ceiling?

A price ceiling is the mandated maximum price a seller is allowed to charge for a product or service. Usually set by law, price ceilings are usually applied only to staples such as food and energy products when such goods become unaffordable to regular consumers. Some areas have rent ceilings to protect renters from climbing rent prices. Another such price control sometimes imposed by governments is a price floor, which sets a minimum price at which a product or service can be sold.

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Price Ceiling

The Impact of Price Ceilings

Price ceilings can be advantageous in allowing essentials to be affordable, at least temporarily. However, economists question how beneficial such ceilings are in the long run, even at protecting the most vulnerable consumers from high prices. they even protect and for many reasons, can also carry disadvantages.

Price ceilings can make essentials affordable in the short term, but may not be beneficial in the long run.

A case study helps underline those drawbacks. In the 1970s, the U.S. government imposed price ceilings on gasoline, after some sharp rises in oil prices. As a result, shortages quickly developed. The low regulated prices, it was argued, were a disincentive to domestic oil companies to step up (or even maintain) production, as was needed to counter interruptions in oil supply from the Middle East.

As supplies fell short of demand, shortages developed and rationing was often imposed, through schemes like alternating days in which only cars with odd- and -even-numbered license plates would be served. Those long waits imposed costs on the economy and motorists through lost wages and other negative economic impacts.

The supposed economic relief of controlled gas prices was also offset by some new expenses. Some gas stations sought to compensate for lost revenue by making formerly optional services such as washing the windshield a required part of filling up, and imposed charges for them.

The consensus of economists is that consumers would have been better off in every respect had controls never been applied. If the government had simply let prices increase, they argue, the long lines at gas stations may never have developed, and the surcharges never imposed. Oil companies would have bumped up production, due to the higher prices, and consumers, who now had a stronger incentive to conserve gas, would have limited their driving or bought more energy-efficient cars.m.

A broader and more theoretical objection economists voice about price ceilings is that they create what's termed a deadweight loss to society. That's a term to describe an economic deficiency that disturbs the equilibrium of a marketplace and contributes to making it more inefficient.

Rent Ceilings

Rent controls are another frequently cited example of the ineffectiveness of price controls. These were implemented in New York City and other cities in New York State in an effort to help maintain an adequate supply of affordable housing. However, the actual effect, critics say, has been to reduce the overall supply of available residential rental units, which in turn has led to even higher prices in the market.

Further, some housing analysts say, controlled rental rates also discourage landlords from having the needed funds, or at least committing the necessary expenditures, to maintain or improve rental properties, leading to deterioration in the quality of rental housing.