Price ceiling

A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments impose price ceilings to protect consumers from conditions that could make commodities prohibitively expensive. Economists generally agree that consumer price controls do not accomplish what they intend to in market economies, and many economists instead recommend such controls should be avoided.

While price ceilings are often imposed by governments, there are also price ceilings that are implemented by non-governmental organizations such as companies, such as the practice of resale price maintenance. With resale price maintenance, a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or below a price ceiling (maximum resale price maintenance) or at or above a price floor.

Isabella Weber and her colleagues argue for price caps to combat sellers' inflation.

Paul Krugman changed his mind and expressed interest in adding price caps to the toolkit to fight inflation.

There is a substantial body of research showing that under some circumstances price ceilings can, paradoxically, lead to higher prices. The leading explanation is that price ceilings serve to coordinate collusion among suppliers who would otherwise compete on price. More precisely, the formation of a cartel becomes profitable by enabling nominally competing firms to act like a monopoly, limiting quantities and raising prices. However, forming a cartel is difficult because it is necessary to agree on quantities and prices, and because each firm will have an incentive to "cheat" by lowering prices to sell more than it agreed to. Antitrust laws make collusion even more difficult because of legal sanctions. Having a third party, such as a regulator, announce and enforce a maximum price level can make it easier for the firms to agree on a price and to monitor pricing. The regulatory price can be viewed as a focal point, which is natural for both parties to charge.

One research paper documenting the phenomenon is Knittel and Stangel, which found that in the 1980s United States, states that fixed an interest rate ceiling of 18 percent had firms charging a rate only slightly below the ceiling. States without an interest rate ceiling had interest rates that were significantly lower. The authors did not find any difference in costs that could explain the result.

Rent Controls were instituted in the US in the 1940s by then-president Franklin D. Roosevelt and his newly-formed Office of Price Administration. The Office instituted price ceilings on a wide range of commodities, including rent controls that allowed returning World War II veterans and their families to afford housing. Following the predictions of economic models, this policy lowered the supply of rentable properties available to veterans. At the same time, there was an increase in homeownership and the number of homes for sale. This outcome could be explained by landowners converting their rentable property to sellable property, due to the financial unviability of rental markets and no incentive by the landowner to destroy their property or leave it vacant.

According to professors Niko Määttänen and Ari Hyytinen, price ceilings on Helsinki City Hitas apartments are highly inefficient economically. They cause queuing and discriminate against the handicapped, single parents, elderly, and others who are not able to queue for days. They cause inefficient allocation, as apartments are not bought by those willing to pay the most for them. Also, those who get an apartment are unwilling to leave it, even when their family or work situation changes, as they may not sell it at what they feel the market price should be. The inefficiencies increase apartment shortage and raise the market price of other apartments.