Evaluate the impact of a price ceiling

A price ceiling is defined as a maximum price for a good set below the market equilibrium price, typically to protect the consumers of that specific good. Rent controls in the housing market are an example of a price ceiling. The consequence of a price ceiling is that the quantity demanded of the good is greater than the quantity supplied for that given price. This is a case of market failure as the market does not allocate the resources efficiently. Although intended to provide affordable housing, government intervention through a price ceiling can be in this case counterproductive. As demand is greater than supply, a black market is likely to emerge in which consumers will be charged a price greater than the initial equilibrium price. See diagram.

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Answered by Ludovic A. Economics tutor

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