Introduction
It goes without saying that economics and government go hand-in-hand in when it comes to controlling the economy of a certain country. While the government may impose limits and restrictions on how the economy should be run, it is recommended that these decisions are in line with economical ones so as to ensure that the general economy runs smoothly. On the other hand, the economy should also be kept in check by the government so that goods, products, and services will remain affordable and within reasonable price.
One concept in economics in which the relationship between the field of economics and the government can be clearly observed is the price ceiling, and by extension, the price floor. A price ceiling is the highest allowable price a seller can impose on the buyers. The theoretical concept behind the price ceilings is that the government can ensure that the goods offered will be available even to the low-income customers.
The rationale and effectiveness of price ceilings, as well as notable examples, will be discussed below.
Price Ceilings: An Overview
Since time and again, the government has always had a role in attempting to regulate the economy of goods and services by imposing a price ceiling on certain goods. For example, in the medieval ages the price of bread was heavily regulated. Another more relatively recent example would be President Nixon’s declaration of prince increase being illegal in 1971 so as to attempt subduing the rising threat of inflation (Tabarrok, n.d.).
At first glance, price ceilings can be seen as reasonable. After all, it makes the most basic of goods readily accessible for the customers who cannot readily adapt to an increase in price, such as the low-income ones. There are many variants of the price ceiling. For instance, a price ceiling imposed in rent is more known as rent ceiling, and the ones on loans is referred to as loan ceiling. No matter the variant, the reason behind these is simple—it aims to discourage the good and service from being too high that it perils the income of the consumers.
However, price ceilings can be seen as not effective some times. In the extreme of case, they can even be considered disadvantageous and detrimental to the economy. In order to understand why, the concepts of supply and demand, shortage and surplus, and equilibrium will be expounded upon.
Price Ceilings: Shortage, Surplus, Equilibrium
In economics, there is a concept called supply and demand curve. The supply of a product is how much of it is available to the general market, while demand is how much the consumer population demands of the product.
Usually, demand is largest when the price is high and the quantity is low. The inverse is true for the supply: it is highest when the price is low and quantity is high. If the two were to be graphed, the supply curve would follow an upward curve while the demand curve would be downward. If supply exceeds demand, there would be a surplus and if demand exceeds supply, there would be a shortage. Eventually, there will come a point where supply will equate to demand—a state known as equilibrium in economics. Economists aim that the price of a product or a service is more or less coincidental with the equilibrium price so that the marker remains stable.
However, problems come in when the price ceiling allocated for the product is set below the equilibrium price. If the price ceiling is below the minimum price, there will be a debilitating condition known as deadweight loss. There will be either an excess of demand or a shortage of supply that will happen—because of the lower price, producers will not produce as much, but it will attract customers. In the end, the producers will be harmed, leading to a scarcity of goods and in some cases, the development of a black market in order to meet the market demands (“Price Floors and Price Ceilings”, n.d.)
Figure 1. The Supply and Demand Curve with a Price Ceiling Less than Equilibrium. Retrieved from http://www.econport.org/content/handbook/Equilibrium/Price-Controls/mainColumnParagraphs/0/content_files/file0/price_controls_ceiling.gif
Examples of Price Ceilings
Price ceilings are commonly found in real life, most noticeably in rent control. To give more affordable housing to its citizens, the government frequently attempts to dictate how the housings charge for its tenants. Another example is the usury laws, which are designed to limit on how loaners charge for the interest for the loans that they give. Since this limit restricts the highest amount for a loan, it can also be considered as a price ceiling in a sense. A historical example would be the price ceiling on gasoline during the 1970s in the United States, which resulted in an increased demand for gasoline, which eventually caused shortage for the supply. Research shows that the price of gasoline would be higher had the prices had not been controlled at all (Baye, 2006).
Conclusion
Price ceiling is the restriction of the government on the prices of the goods and services sold in the black market so as to ensure that consumers can afford even the basic of goods. However, problems arise when the price ceilings imposed are below to what the economy perceives as the equilibrium price for that product. Just like any other economical concept, government and economics need to cooperate so as the market remains progressive and stable.
References
Baye, M. R. (2006). Managerial Economics and Business Strategy. New York: McGraw-Hill Irwin.
“Price Floors and Ceilings” (n.d.). EconPort. Retrieved from http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html
