What is a price ceiling?

A price ceiling is a maximum price set by the government that sellers can charge for a good or service. The primary purpose of a price ceiling is to protect consumers from exorbitant prices during times of crises or when market conditions would otherwise lead to excessive pricing. For example, in the housing market, a price ceiling may be imposed on rent to ensure that affordable housing remains available to tenants.

If the price ceiling is set below the equilibrium price, it can lead to shortages, as the quantity demanded exceeds the quantity supplied at that capped price. Understanding the dynamics of a price ceiling is crucial for analyzing market behaviors and the unintended consequences that can arise, such as reduced incentive for producers to supply goods or the emergence of black markets.

In contrast, other choices describe different concepts: a minimum price set by the government defines a price floor, not a ceiling, while peak demand prices pertain to pricing strategies within supply and demand variations, and capping inflation refers to broader economic policies rather than a specific pricing mechanism.