Per Tse (2025) a price ceiling is a legal maximum on the price at which a good can be sold. It is a price restriction set in place by governments. It must be binding to be effective (set below equilibrium price). This is the opposite to a price floor.
A ceiling can be binding and not binding:
Binding: a price ceiling that is binding is set below equilibrium, meaning it has an effect on the market price (it creates a shortage).
Not Binding: a price ceiling that is not binding is set above equilibrium, meaning it has no effect on the market price (no shortage created).
Examples:
Per Segal (2025), rent ceilings is a common example of a price ceiling, whereby the price of rentals is restricted. However, it is frequently cited as an example of the ineffectiveness and downfall of price ceilings: critics note that price ceilings reduce the overall supply of available rental units (in their example, New York City in particular). Further, some housing analysts say reduced rental rates prevent landlords from having the required funds to maintain property, leading to a “deterioration in the quality of rental housing.”
Prescription drugs are commonly subsidised by governments or insurance companies per Segal (2025), incentivising drug manufacturers to raise prices, leading to Joe Biden signing the Inflation Reduction Act in 2022, which included price ceilings on the prices of certain drugs.
Per Segal (2025), there are several types of price ceilings:
Selective price ceiling: limit on the price of a specific type of good or service (rather than broad market segments, it’s imposed on particular goods/services).
Absolute price ceiling: fixed limit on the price that can be charged for a good or service.
Relative price ceiling: limit on the price of a good or service in relation to another good or service (eg.: rent in relation to average income of renters in a particular area).
Per-unit price ceiling: limit on the price of a good or service per unit (often applied to commodities like fuel).
Periodic price ceiling: limit on the price of a good or service for a specific period (eg.: price ceiling on electricity prices during the summer months).
Advantages of price ceilings per Segal (2025),
- Goods or services are more affordable for consumers.
- Prevents price gouging.
- Mitigates higher prices during supply shortages.
- Can stimulate demand and encourage spending within the economy.
Disadvantages of price ceilings per Segal (2025),
- Demand for a good will rise very quickly, leading to shortages in supply.
- If prices are capped beyond what producers can manage, something will have to give in: producers may have to cut corners by reducing quality, or charge higher prices on other products, discontinue or produce less causing more shortages, or even be driven out of business if not enough profit is made.
Works cited:
Tse, Harry. “Lecture-3 Equilibrium Elasticity.” 2025.
Segal, Troy. “Price Ceiling Types, Effects, and Implementation in Economics.” Investopedia, 2 Feb. 2025, www.investopedia.com/terms/p/price-ceiling.asp.
