Business, Legal & Accounting Glossary
A price ceiling is a limit for which certain goods or services can be sold. Price ceilings are often imposed by governments. For example, in Singapore, there are price ceilings on starting taxi fares. Price ceilings are introduced to protect consumers.
A price ceiling is recognized as a policy that is used to maintain the price of a certain good at a certain level. The phenomenon of price ceiling takes place when the government puts a limit on the rise of the price of any product. A price ceiling is effective only when it is put below the natural market equilibrium.
When the price is set below the equilibrium market price, sellers cannot sell a product at the desired price. Hence, some of the sellers drop out of the market and there is a reduction in quantity supplied. Consumers find that they can get the same product at a lower price; hence the demand for the product rises. Due to this, quantity demanded increases more than quantity supplied and there are various types of non-price competitions. There arises inefficiency in the market due to the price ceiling. Marginal benefit exceeds marginal cost. This inefficiency is termed as a deadweight loss.
Consumer surplus is a consumer’s benefit. This happens when a consumer who is capable of paying a larger amount, gets the same product by paying less money. Producer surplus is the difference of price that he was willing to charge for a product and the actual price at which he sells the product now.
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This glossary post was last updated: 29th March, 2020 | 0 Views.