ECON 1000 Lecture Notes - Lecture 9: Income Tax, Price Floor, Economic Equilibrium
2 Nov 2011
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A price ceiling or price cap is a regulation that make it illegal to charge a price higher than the specified level. When a price ceiling is applied to a housing market it is called a rent ceiling. If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling. But if the rent is set below the equilibrium, there are powerful effects. More people would want houses or apartments at the new, lower price. The quantity demanded would be more than the quantity available. This creates a shortage of resources available. Because the legal price cannot eliminate shortages of resources, other mechanisms operate to compensate for this. The more time it would take to find an apartment due to shortage is a cost. Some people may be willing to pay more illegally to eliminate the waiting or searching time.
