Price ceilings are government-mandated maximum prices for goods and SERVICES. In the United States, local governments and the federal government have passed laws stating that the prices for certain goods and services could not go above a set amount. Unlike PRICE FLOORS, which are intended to keep prices high to protect producers, price ceilings are designed to keep prices low to help consumers. There are two general uses of price ceilings in the United States: local rent-control laws, and federal price ceilings on goods and services during times of market pressure. Rent-control laws, which set the maximum price a landlord may charge for rent, were often enacted in cities during the 1960s and 1970s. During that period there was a huge influx of people to urban areas around the country. Landlords who were faced with a limited SUPPLY of apartments and significant DEMAND often raised their rents. Consumer groups claimed this was price gouging and portrayed landlords as unfair monopolists taking advantage of powerless consumers. The goal of rent control was to protect tenants from constantly rising prices. Rent controls or any price ceiling have no impact if the market price is less than the maximum price allowed. If, however, the market price is greater than the price ceiling, quantity demanded will exceed quantity supplied, and a shortage will exist. In response, people looking for apartments will often pay thousands of dollars in “key money” to people vacating their rent-controlled apartments for the privilege of taking over those apartments. One effect of rent control is that owners of rentcontrolled buildings will often minimize or eliminate maintenance, arguing that they cannot afford it. Eventually this leads to a decrease in the supply of apartments, further exacerbating the shortage in the market. Developers, unwilling to build new apartments in rent-controlled areas, will build in areas outside the city limits. Over 125 U.S. cities have rent controls. The other use of price controls is to restrict the rise in prices of consumers goods and services when crises occur. During World War II, the federal government bought many RESOURCES and products for the war effort, making it a huge source of increased demand. It was therefore necessary to place price controls on many goods, since without controls market prices would go up, increasing the cost to the government and causing INFLATION. Shortages created by the price ceilings created opportunities for black markets, where consumers willing to pay the market price were able to find the products they desired. In 1971 President Richard Nixon imposed price and wage controls an attempt to control inflation. These laws, in effect for three years, were blamed for the shortages of gasoline during the 1970s oil EMBARGOes. In 1989 the mayor of Charleston, South Carolina, Joe Riley Jr., imposed price controls immediately after Hurricane Hugo devastated his city. Retailers were banned from charging prices higher than what they had charged the day before the hurricane hit. Critics contended the price controls reduced the incentive for suppliers to ship needed food and repair goods to the city, while others supported the measure to protect citizens in markets where it was difficult for them to access information needed to make rational choices during a time of crisis. Many Eastern European countries and EMERGING MARKETS have also instituted price ceilings at times, usually for necessity items such as gasoline or food. To pay for controlled prices, governments are frequently forced to resort to monetary finance, accelerating the creation of MONEY in the economy. This usually results in inflation, which further exacerbates the problem of price ceilings.
See also WAGE AND PRICE CONTROLS.