Question

What is maximum price ceiling? On what type of goods is it normally imposed? Used diagram.

Answer 1

Price ceiling is the legislated or government imposed maximum level of price that can be charged by the seller. Usually, the government fixes this maximum price much below the equilibrium price, in order to preserve the welfare of the poorer and vulnerable section of the society. Let us understand the effect and rationale behind imposing price ceiling by taking the example of the onion market.

Let $DD$ represents the demand curve depicting the market demand for onions and $SS$ represents the supply curve depicting the market supply of onions. The equilibrium as determined by the intersection of market demand curve and market supply curve is at $E$ with equilibrium output $O{q}^e$ and equilibrium price $O{P}^e$. Now, let us suppose that government imposes price ceiling at $O{P}^{\ast }$ which is much lower than the equilibrium price $O{P}^e$. The imposition of the price ceiling will enable the poor people to afford onions at a comparatively lower price of $O{P}^{\ast }$. Thus, the government by imposing price ceiling interferes the market forces and artificially lowers the market price. However; at $O{P}^{\ast }$, there exists an excess demand as the demand for onions $\left(q^{\prime }d\right)$ exceeds the supply of the onions $\left(q^{\prime }s\right)$.

The Government of India imposes price ceiling in the market of wheat, rice, sugar and other necessity goods.