Price ceiling is a pricing strategy that the government uses to ensure that the public has protection against all possible events where traders charge them exorbitant prices. For instance, when the market is monopolistic in nature. Then, a high inflation rate will force the company enjoying monopoly powers to increase the prices of its commodity. The government, on the other hand, will step to set a price ceiling indicating the fairest price for the product to protect the buyers from overpriced goods and the suppliers from high losses.
Although price ceilings are used for the good of the market, they have a tendency to introduce various challenges. This is especially if the rationing is not under control. This usually happens when the price ceiling is imposed for a long period. Unexpected shortages are the number one negative effects of the pricing strategy on a market economy. A price ceiling often affects pricing, commodity quantity, and the market welfare in general. The opposite of pricing ceiling is a pricing floor. there, the government determines how low the price of a certain commodity may go.
What Is a Price Ceiling?
A price ceiling refers to a pricing strategy imposed by governments with the aim of price control. They limit the price that a certain product can have. Usually, a price ceiling is supposed to be below the natural market equilibrium for effectiveness. The demand for the commodity in question is higher at the price ceiling in comparison to the equilibrium price.
However, the supply at the price ceiling is lower than at the equilibrium price. Hence, it is resulting into shortages due to the unmet demand. This is true since the marginal benefit at the price ceiling is higher than the marginal cost hence the dead weight welfare loss.
Who Needs Price Ceilings the Most?
Price ceilings are common in a monopolistic market where one enterprise controls a certain commodity’s supply. Their dominating nature allows them to manipulate the commodity prices such that their products become unjustifiably expensive to most consumers.
However, the consumers have no option but to buy the product since no other supplier exists in the market. In this case, the supplier benefits through higher returns as a result of profit maximization. Other industries like gas production cannot limit their products by price ceilings because a shortage in their supply would greatly affect the economy.
How the Government Imposes A Price Ceiling
- The government first considers the characteristics of the market economy with respect to demand and supply. When a single supplier controls a certain product, they exploit the customers. This is since the latter have no option but to buy the products as they need it.
- In such situations, the government has to consider imposing a price ceiling for the commodity’s cost to limit consumer exploitation. This way, the customers are able to obtain the quantity of products they need to fulfill their demands. The suppliers will also be able to optimize on their stock hence making profits. The price ceiling in this case helps limit the increase of prices to certain levels.
- The main effect of price ceilings in businesses is an increase in the quantity demand. This appears since the prices are lower than the equilibrium. In response, the quantity supply reduces since the price is below equilibrium and would result into losses.
- Price ceilings, however, do not apply in some situations like in the supply of gas. The reason for this is that the shortage would have negative effects in the market. As a result, the government devices ways to deal with limit in the supply in a monopolistic economy without having to impose any price ceilings.
4 Ways to Successfully Cope With a Price Ceiling
A price ceiling has numerous negative effects in market economy since once imposed. Businesses must figure out another way of distributing the low supply to the many consumers willing to buy it without altering the price. In so doing, the prices will have to remain unchanged. This implies that the people who will consume it will have to go through a selection. A good example of these ideas include the below.
- Historical use: This is where the government gives the old consumers an opportunity to continue acquiring and using a product. If the prices of the commodity reduce, more people would emerge claiming to being former consumers of the product. It would also cause a reduction in the quantity supply. Hence, it will be increasing the demand that customers have for the product.
- First come, first served: This happens especially when it comes to movies with limited number of tickets. When a movie comes out, many fans line up to acquire tickets even for a week. The fact that the tickets are limited increases their demand. Therefore, consumers opt to line up for days because of the first come, first served principle.
- Black market operations: This is where one can get a commodity at a lower price regardless of the short supply and sublease it for a higher price. For example, you can rent a house for $1,000 and sublease it to a client willing to pay $1,500 when you are not living there.
- Lottery: Businesses and the government prefer lotteries. They act as such because they help distribute a commodity that has a short supply but high demand. A good example is the hunting of moose, which has a high demand and only those drawn in a lottery are allowed to shoot a moose on specific days.
A price ceiling is a price control move by the government since it gets to determine how high the prices of a product can go. When the prices of a commodity are under control, their demand increases with its supply remaining low because the price is usually lower than the equilibrium price. Price ceilings have negative effects such as the shortage created and the imbalance that results in the market.
However, this pricing strategy is beneficial. This is since some market players artificially adjust their product prices and quantities available. In such a case, a price ceiling may be imposed when the public pressure forces the government to develop regulations that dictate how low or high prices go.