Friday, February 12, 2010

Does a price ceiling imposed by the government result in a shortage or surplus?

A price
ceiling imposed by the government will always (according to economists) result in a shortage of
the good or service whose price is being capped.

The reason for this is that
the price will be capped (presumably) at a level below the market equilibrium.  At this price
point, the quantity demanded will be greater than the quantity supplied.  This will result in a
shortage.

Perhaps the classic example of this (used in many textbooks) is the
case of rent control.  When rents are capped, landlords tend to get out of the rental business
even as more tenants wish to rent at the capped prices.  This leads to a shortage of
apartments.

Please follow the link for an excellent discussion of this
complete with an interactive graph.

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