What is the effect of price ceilings on market equilibrium?

Price ceilings are government-imposed limits on how high a price can be charged for a product or service. When a price ceiling is set below the market equilibrium price, it prevents prices from rising to their natural level determined by supply and demand.

The effect of this limitation is that it can create a situation where the quantity demanded for the good exceeds the quantity supplied at that ceiling price, leading to a shortage. In other words, consumers want to buy more of the product at the lower price, but suppliers are not willing to supply enough of the product at that price due to lower potential revenues. This imbalance results in unmet demand, where not all consumers are able to purchase the product.

In contrast, a price ceiling does not guarantee a surplus of goods, as there is no excess supply created by the restriction; rather, it causes consumers to compete for a limited supply. Additionally, while it may affect competition, it does not eliminate competition outright, as other producers may still exist in the market. Lastly, price ceilings do not stabilize prices instantly; instead, they disrupt the natural price-setting mechanism that responds to changes in supply and demand.