|Posted on April 14, 2014 at 6:50 PM|
A price ceiling is a price control set by the government. A ceiling is a legal maximum price that must be below the free market equilibrium. The government's intent is to help consumers with low incomes. An effective price ceiling leads to a shortage of goods (quantity demanded is greater than the quantity supplied). It causes a misallocation of economic resources and deadweight loss (inefficiency). In the long run, the shortage worsens as producers exit the industry. Sometimes illegal markets (black markets) will develop to attempt to satisfy the high quantities demanded.
The No Bull Review video below discusses the effects of price ceilings and shows the areas of deadweight loss, consumer surplus, and producer surplus.
AP Macroeconomics / Microeconomics Unit 1 Basic Economic Concepts