A regulation that prohibits the payment for a good or service that is higher than an alloted price. Similar to
price floors, it is used by government and other governing bodies.
The alloted price must be below the
equilibrium price as otherwise, it would not cause an effect on the
markets in question. What this causes is a
shortage in the good or service and creates
inefficiency. It does it in two ways:
1) Through search activity
2)
Deadweight Loss
1) Due to a shortage, people will be spending their time and resources looking for the good or service. For example, if there is a shortage for quality housing, people will be using their resources like gas, and time to look for housing. In turn, the
opportunity cost increases by this time factor and other resource factors. This creates a loss of
consumer surplus and
producer surplus.
2) Since the set point is below the
equilibrium price, there is an inefficiency in the market as the demand is much higher than the supply, there is a shortage. This creates a situation where there is a
deadweight loss which in turn, like search activity, generates a loss in both
consumer surplus and
producer surplus.