Figure 5-3 A Price Ceiling and Black-Market Pricing
Price Ceilings
A price ceiling is the maximum price at which certain goods and services
may be legally exchanged. Price ceilings on oil, natural gas, and rental
housing have been frequently imposed by federal and provincial
governments. If the price ceiling is set above the equilibrium price, it has
no effect because the free-market equilibrium remains attainable. If,
however, the price ceiling is set below the free-market equilibrium price,
the price ceiling lowers the price and is said to be binding. The effects of
binding price ceilings are shown in Figure 5-3 , which establishes the
following conclusion:
A binding price ceiling causes excess demand and invites a black -
market. The equilibrium point, E, is at a price of and a quantity of
If a price ceiling is set at the quantity demanded will rise to and the
quantity supplied will fall to Quantity actually exchanged will be
But if all the available supply of were sold on a black market, the price
p 0
p 1 , Q 1
Q 2.
Q 2