Price Ceiling:  

Sometimes the government of a country believes that prices determined by the free market are too high. A price ceiling occurs when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium. A price ceiling is set when the market price is considered to be too high. An example of this is the rent control legislation in New York City. Some apartments in New York are rented at prices that are much lower than what could be charged for the apartment if its rent were set by the market. Rent control legislation reflects price controls imposed during World War II to protect people from inflated price created by a wartime housing shortage.

For a price ceiling to be effective, it should be set below the equilibrium price and quantity. When a price ceiling is set, a shortage occurs because for the price that the ceiling is set at, there is more demand than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied. There will be inefficiency because at the price ceiling quantity supplied, the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss. If the price ceiling is too low, it can drive suppliers out of the market (reducing the supplied resources), while the lower price drives increased consumer demand. When the demand increases beyond the ability to supply, shortages occur. This creates a rationing of the product by the market. Some consumers could experience longer lines for the product or no available products when they need or desire to purchase. Sometimes governments combine low price ceilings with government rationing programs that mandate how the market will allocate the now inadequate supply of goods.