• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Penpoin.

Better Knowledge. Your Insight Is Sharper

  • Business
    • Starting Business
    • Managing Business
    • Growing Business
  • Investing
    • Investing Fundamentals
    • Investment Options
  • Economic Context
    • Microeconomics
    • Macroeconomics
    • International economics
Home › Economic Context › Microeconomics

Price Ceiling: Meaning, Impacts, Pros, Cons

January 21, 2025 · Ahmad Nasrudin

Price Ceiling Meaning Impacts Pros Cons

Contents

  • When is the price ceiling effective?
  • Impacts of the price ceiling
  • Advantages and disadvantages
  • LEARN MORE

The price ceiling is the maximum price set by the government for certain goods. Sellers are not permitted to sell higher than that price.

The government sets a maximum price to protect consumers from conditions that can make goods very expensive. High prices can occur because of a monopoly on a product, an investment bubble, or during periods of high inflation.

The government feels that the market price for goods or services is too high. To keep products affordable for the people, the government sets a price ceiling.

An example of such a ceiling is rent control. Other examples are the price of fuel oil and agricultural insurance premiums. 

Limiting prices to more affordable levels seems like a noble idea. However, that also creates another consequence, namely shortage.

When is the price ceiling effective?

Price ceilings limit the maximum selling price of goods or services. The seller or manufacturer cannot set a price above that rate.

A price ceiling is effective and can disrupt market equilibrium if the government sets it below market equilibrium. As lower than the equilibrium, the price will tend to rise due to excess demand.

On the contrary, the price ceiling is ineffective if the government sets it above the equilibrium price. The price is higher for consumers. Because of higher than equilibrium, the price tends to decline due to excess supply. Thus, a ceiled price above equilibrium is not in line with the initial objectives of the government, maintaining the affordability of goods.

Impacts of the price ceiling

Because the government sets a maximum price below the equilibrium price, the market experiences a shortage because the quantity demanded is greater than the quantity supplied. A shortage occurs as the lower price stimulating higher demand, and at the same time, it encourages producers to provide less.

Price ceiling
Price ceiling

Say, the equilibrium price is at Rp10. At this price, the quantity supplied is equivalent to the quantity demanded, which is 210 units. When the government sets a price ceiling of Rp5, the producers reduce the quantity supplied to 120 units. At the same time, because the price is lower, consumers increase the quantity demanded to 280 units. As a result, it produced a shortage of 160 units (280-120).

Although the shortage occurs in the market, the price does not move up. The market mechanism does not work to return it to equilibrium because there is government control.

Black market

Shortage requires rationing and can give rise to the black market. The black market occurs because some people are willing to pay higher prices for goods, so they don’t queue up.

Realizing the benefits of the black market, some producers may reduce their sales in the market. They diverted it on the black market. This diversion results in a far greater scarcity.

In addition to selling options on the black market, producers try to avoid the maximum price by charging additional costs or reducing the quality of the goods. The goal is, of course, to maintain profits.

Deadweight loss

The price ceiling creates a deadweight loss. Consumers get more benefits from receiving a lower price than they should (the equilibrium price). As for producers, it is a loss. In terms of price ceilings, some parts of producer surplus are converted to consumer surplus.

Advantages and disadvantages

Price ceilings discourage producers from producing products and services. Companies are reluctant to supply because they have to accept lower prices than they should. If the government sets it too low below the equilibrium price, it can force producers to reduce economic output.

To reduce these negative impacts, the government usually provides other incentives for producers, such as subsidies. By doing so, the producer receives compensation for losses incurred.

Meanwhile, for consumers, lower prices allow them to buy. It is essential during high inflation because it makes the cost of living affordable and prevents a sharp rise in prices.

LEARN MORE

  • Externalities: Meaning, Types, and Solutions
  • Market Failure: Types, Effects, and Solutions
  • Monopoly Power: Meaning, Sources, and Effects
  • Government Intervention: Examples, Reasons, and Impacts
  • Free Rider: Meaning, Examples, Impacts and Possible Solutions
  • Social Cost in Economics: Meaning, Components, Formulas, and Effects
  • Nash Equilibrium: Meaning, Concept and Examples
  • Market Power: Determining Factors, Effects, How to Measure
  • Why are some markets becoming more competitive?

About the Author

I'm Ahmad. As an introvert with a passion for storytelling, I leverage my analytical background in equity research and credit risk to provide you with clear, insightful information for your business and investment journeys. Learn more about me

TRENDING

  • Understanding Factors in the Business Environment: A Deep Dive for Their Lists (Concise Explain)
  • Business Size: How Business Scale Shapes Success (Importances, Measurement, Classification)
  • Government Intervention: Examples, Reasons, and Impacts
  • Pink's Theory of Motivation: Elements and A Brief Explanation
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • Values, Attitudes and Lifestyles (VALS): Categories and Why They Matter
  • Top-Level Management: Examples, Roles and Responsibilities, Skills

LATEST

  • Key Factors to Consider Before Investing In Fixed-Income Securities
  • 4 Risks Associated with Fixed-Income Investments
  • 4 Benefits Investing in Fixed-Income Securities
  • Decoding the Modern Fixed-Income Market: A Guide for Investors
  • 4 Essential Fixed Income Terms You Must Know
  • Popular Types of Fixed-Income Securities
  • What Makes an Investment “Fixed Income”

FIND OUT MORE

CATEGORIES

Economic Context Fixed-Income Investing Grow Your Business Investing Fundamentals Investment Options Manage Your Business Start Your Business

Primary Sidebar

TRENDING

  • Understanding Factors in the Business Environment: A Deep Dive for Their Lists (Concise Explain)
  • Business Size: How Business Scale Shapes Success (Importances, Measurement, Classification)
  • Government Intervention: Examples, Reasons, and Impacts

LATEST

  • Key Factors to Consider Before Investing In Fixed-Income Securities
  • 4 Risks Associated with Fixed-Income Investments
  • 4 Benefits Investing in Fixed-Income Securities

Copyright © 2025  ·  Contact Us  ·  About Us  ·  Terms of Use  · Privacy Policy and Disclaimer  · Affiliate Disclaimer·  Comment Policy