Question

What is a price ceiling and what are its economic effects?

Answer 1

Meaning of a price ceiling

A price ceiling is the highest price that sellers are legally allowed to trade their products. An example of a price ceiling is rent control that dictates the rent that landlords are supposed to charge the tenants. 

Economic effects of a price ceiling

1. Shortage: When a price ceiling is imposed, the quantity demanded surpasses the quantity supplied. Hence, there will be a shortage in the market when a price ceiling is enacted. 
2. Black market: A price ceiling results in the emergence of a black market. A black market entails an unlawful market in which a product is traded at a price higher than the price ceiling.