What Is a Price Ceiling? 4 Examples of a Price Ceiling

In macroeconomics, a price ceiling is an economic principle that determines the maximum price of goods or services. Governments can set the imposed price, which is typically lower than the market equilibrium price. In economics, the equilibrium price refers to the point where supply and demand curves meet, or more simply, the price a consumer is willing to pay for a product or service.

Known effects of price ceilings include lower quality products or supply shortages. Other effects of a price ceiling are goods that show up on the black market. Another consequence is what economists call a deadweight loss—this is when a minimum price discourages production and leads to the inefficient allocation of goods.

When it comes to establishing price ceilings, companies and governments show more interest in limiting certain industries, markets, and customers over others. At other times, there are economic factors that necessitate or result in price ceilings. Here are a few examples of a price ceiling as an economic principle:

1. 1. Insurance reimbursement: Medical insurance companies often set maximums on the amount they will reimburse doctors or the amount they will reimburse patients for office visits. You could therefore consider medical insurance an industry in which price ceilings play a role.
2. 2. Prescription drugs: The government can set the maximum price for some drugs. This is meant to ensure that everyone has access to medication, especially low-income people amid otherwise free-market pricing.
3. 3. Rent control: In some cities, such as New York City, there are certain buildings or rental units that are subject to rent control—a law that limits rental rates. This determines the maximum price or the maximum percentage a landlord can legally raise the rent each year for the apartment. Rent control is a government intervention to keep rental housing costs down in an effort to create more affordable housing units.
4. 4. Wartime pricing: One historical example of a price ceiling is the wartime pricing that occurred during World War II. Over this period of time, the government set the price of many consumer goods (for example, products made of paper, lumber, or rubber) to below natural market price in an effort to control inflation and prevent prices from rising too quickly when there was a low supply and excess demand.

Governments or producers can set the lowest price for goods or services—this is called a price floor, or price supports. A price floor, which is the opposite of a price ceiling, can help an industry avoid a producer surplus and is one tool a government can use as an intervention to increase prices. Typically, decision-makers set the price floor above the market equilibrium price. One of the potential effects of a price floor is higher prices, which might benefit producers, farmers, or factory owners or workers.

Examples of a price floor—a set lowest price for goods or services—are common in the labor market and in agriculture. A few examples include:

1. 1. Agricultural products: The price of milk is an example of a price floor. Consumers do not always pay higher prices for milk. In some cases, the government subsidizes the price or pays the farms directly. This measure aims to ensure that farmers make enough money to keep their farms open, even if there is an excess supply of milk, which, under a competitive market, would lower the price of a gallon of milk.
2. 2. Interest rates: Consumers and organizations are both subject to interest rate price controls. They can be in the form of a floor or a cap. An interest rate floor, especially in reference to interest charged on a loan or deposits, refers to the lowest price or lowest rate of return for that money each quarter or any specified amount of time.
3. 3. Minimum wage: This government-set price control on labor intends to ensure workers receive enough income to live above the poverty line and assist low-income employees. The minimum wage determines the lowest hourly rate an employer can pay an employee.

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