How Price Ceilings Affect Market Outcomes

When the government, moved by «he complaint» and campaign contributions of the Ice-Cream Eaters, imposes a price ceiling on the market for ice cream, two outcomes are possible. In panel (a) of Figure 1, the government imposes a prke ceiling of $-1 per cone. In thb case, because the prke that balances supply and demand ($3) is below the ceiling, «he prke ceiling is n«>f binding. Market forces naturally move the economy to the equilibrium, and the price ceiling has no effect on the price or the quantity sold.

Panel (b) of Figure 1 shows the other, more interesting, possibility. In thb case, tl>c government imposes a price ceiling of $2 per cone- Bccausc the equilibrium prke of $3 is above the prke ceiling, «he ceiling b a fr'mfinj constrain/ on the market. The forces of supply and demand tend to move the price toward tlie equilibrium price, bu« when the market price hits «he ceiling, i« can, bv law, rise no further. Thus, the market prke equals the price ceiling. At thb price, the quantity of ke cream demanded (125 cones in the figure) exceeds the quantity supplied (75 cones). Then:- b a shortage of ke cream: 50 people who want to buy Ice cream at the going price are unable to do so.

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