What is a price ceiling?

What is a price ceiling?

• A. A legal minimum price
• B. A legal maximum price
• C. A measure of price sensitivity
• D. A requirement to price at cost

Answer: (B)

A price ceiling is a legal maximum price set by the government on a good or service. It aims to keep prices affordable by preventing them from rising above a certain level. If the ceiling is below the market-clearing price, it creates a shortage because more people want to buy than producers are willing to supply. If the ceiling is above the equilibrium price, it has little effect because market prices would naturally settle below it. This concept is different from a legal minimum price, which sets a price floor and can create surpluses, and it isn’t about price sensitivity (elasticity) or pricing at cost.

A price ceiling is a legal maximum price set by the government on a good or service. It aims to keep prices affordable by preventing them from rising above a certain level. If the ceiling is below the market-clearing price, it creates a shortage because more people want to buy than producers are willing to supply. If the ceiling is above the equilibrium price, it has little effect because market prices would naturally settle below it. This concept is different from a legal minimum price, which sets a price floor and can create surpluses, and it isn’t about price sensitivity (elasticity) or pricing at cost.