Question

Define a price ceiling and explain how it affects resources allocation in a market. Give a real world example.

Answer 1

Price cieling is the maximum price a producer is allowed to charge for a product or service. It is a government imposed price control. When a price ceiling is set below the equilibrium price, quantity demanded will be more than the quantity supplied which will create a situation of shortage.

Example: Rent control

Note: Price ceiling is done below equilibrium price as producer will always try to sell at or more than the equilibrium price to gain as much as he can.