Price Ceilings

I went down to the demonstration
To get my fair share of abuse
Singing, "We're gonna vent our frustration
If we don't, we're gonna blow a fifty amp fuse"
--The Rolling Stones

The opposite of a price floor is a price ceiling. A price ceiling is a maximum price set by law. Trade at prices above the maximum is prohibited.

Examples of price ceilings are the anti-gouging laws on gasoline imposed by some jurisdictions in the aftermath of Hurricane Sandy last fall. Such laws raise prices to the ceiling and drive supply out of the market. Shortages occur.

Rationing is often considered to be something that occurs only during difficult times when supplies are scarce. By definition, however, all economic resources are scarce--meaning that all economic resources must be rationed.

In unhampered markets, rationing is done by the price mechanism. High price signals elevated demand relative to supply. Resources are increasingly rationed as fewer people purchase at higher prices. Entrepreneurs are challenged to increase productivity in order to bring more supply to market.

In hampered markets, government intervenes to cap the price producers can charge. Productivity improvements are discouraged, and producers leave the market.

Price ceilings, like price floors, reduce general standard of living.