Price Ceiling: It refers to fixing of the maximum price of a commodity at a level lower than the equilibrium price. The government imposes price ceiling in case of essential commodities (Wheat, Sugar; Kerosene etc.) when the equilibrium price determined by free market forces of demand and supply is high.
Implications of price ceiling :
(i) Shortage (excess demand): At this controlled price quantity demanded is more than quantity supplied. It creates a shortage and to overcome this shortage government may enforce the rationing system.
(ii) Black marketing: If rationing is not administered by the government effectively it results in black marketing. Due to excess demand buyers will compete and they would be willing to buy a commodity at a higher price than the price fixed by the government.
