What are the effects of price controls such as a maximum price (price ceiling)

Price controls by the government distort the market as supply is not able or willing to meet demand at the given imposed price. The market may not clear excess demand or excess supply as the price is fixed by some outside authority. For instance, if the price ceiling is under the market equilibrium price then demand will be greater than supply and there thus be a shortage of the good or service. There will also be a deadweight loss for society as some of the suppliers do not sell their product because of the low price and some buyers who were willing to buy at a higher price cannot find the good because of the shortage. A good example of this is rent control. In turn, these shortages lead to a depreciation of the housing stock as owners do not face the pressure to renovate their home. One may then also start a debate about the reason why these price controls are put in place (fairness, price stabilty etc...) and see if they make sense or if there are better alternatives.

JF
Answered by Jan-Luka F. Economics tutor

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