How Price Ceilings Affect Market Outcomes

When the government moved by the complaints and campaign contributions of the ice-cream Eaters imposes a price ceiling on the market for ice cream two outcomes are possible. In the government imposes a price ceiling of $4 per cone. In this case because the price that balances supply and demand is below the ceiling the price ceiling is not binding. Market forces naturally move the economy to the equilibrium and the price ceiling has no effect on the price or the quantity sold.

More interesting possibility. In this case the government imposes a price ceiling of $2 per cone. Because the equilibrium price of $3 is above the price ceiling the ceiling is a binding constraint on the market. The forces of supply and demand tend to move the price toward the equilibrium price but when the market price hits the ceiling it can rise no further. Thus the market price equals the price ceiling. At this price the quantity of ice cream demanded exceeds the quantity supplied. There is a shortage of ice cream so some people who want to buy ice cream at the going price are unable to.

When a shortage of ice cream develops because of this price ceiling some mechanism for rationing ice cream will naturally develop. The mechanism could be long lines. Buyers who are willing to arrive early and wait in line get a cone but those unwilling to wait do not. Alternatively sellers could ration ice cream according to their own personal biases selling it only to friends relatives or members of their own racial or ethnic group. Notice that even though the price ceiling was motivated by a desire to help buyers of ice cream not all buyers benefit from the policy. Some buyers do get to pay a lower price although they may have to wait in line to do so but other buyers cannot get any ice cream.

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