What happens when you remove a price ceiling in a market?

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The answer to this depends on the situation. Historically, price ceilings are established when prices have become very high due to extenuating circumstances, like rapid inflation. If there is a very high demand for a good, establishing a price ceiling could limit supply, because the profits that producers can get...

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The answer to this depends on the situation. Historically, price ceilings are established when prices have become very high due to extenuating circumstances, like rapid inflation. If there is a very high demand for a good, establishing a price ceiling could limit supply, because the profits that producers can get for providing the good or service would be limited. In this situation, removing a price ceiling would incentivize producers to put more of the good or service on the market. On the other hand, if there is a very high demand for the good or service, it could lead to prices rising dramatically.

One example of this phenomenon is housing in urban areas. It is in very high demand—so much so that producers can charge very high rents that are not affordable for anyone but very affluent people. In some places, price ceilings have been established to check the phenomenon of "gentrification," where many longtime residents are driven out of neighborhoods by changes in demand. In this case, removing the price ceiling would allow the market to return to its equilibrium price, where producers are meeting demand, but that price might be higher than is morally acceptable to people who do not believe that people who have lived in urban neighborhoods for many years or generations should be driven out by an influx of affluent people.

In other cases, price ceilings create demand in excess of what producers can conceivably meet in the short term. Removing price ceilings incentivizes producers to make more available, which eases shortages.

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When you remove a price ceiling in a market, the supply is likely to increase, because prices are no longer controlled. In most cases, price ceilings are set below the equilibrium price, making it hard for businesses to maximize profits. The removal of the ceiling means that the forces of supply and demand will determine the market price for the good or service. Since the price ceiling lowered the supply, the goods will be scarce to begin with. As a result of the removal of the ceiling, however, suppliers will offer a larger number of goods and sell them at a high price because the demand is high. Other suppliers will also want to make a profit, and they will increase distribution, selling their items at a slightly lower price. This phenomenon will continue until supply and demand are at equilibrium.

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Let’s first take a look at what happens when you institute a price ceiling. A price ceiling is an artificial cap placed on the price of a good or service that is below the regular market value. (If it were above the market value, it would be called a price floor.) When a government or organization places a cap on the market value of a good, it creates a shortage in the market. If the price of cars, for example, was capped at $10,000, there would be a rush of people wanting to purchase vehicles. At that price, however, car manufacturers will only want to or be able to produce fewer cars because they’re not getting as much money per sale. Thus, with a price ceiling, demand will outweigh supply and there will be a shortage of new cars.

A price ceiling also has other side effects. Say, for example, the government set a ceiling on the price of apartments in Chicago. At $800 for a one bedroom, Chicago would be flooded with renters and there would shortly be no apartments left on the market – a market shortage. In addition to leaving people without the ability to rent apartments, it also creates a net waste. When bedrooms are priced at $800, there are people who would pay $1000 for an apartment and landlords who would happily rent for that price, but they're unable to make that mutually beneficial deal because of the price ceiling. Therefore, there is a $200 wasted potential. The market is not operating efficiently.

Removing a price ceiling returns the market to its natural equilibrium. Due to high demand, prices will rise until the quantity supplied equals the quantity demanded. Some people who were able to afford the $800 apartment will be unable to afford current market rates, so they may have to live outside Chicago where market rates are lower. Overall, removing a price ceiling returns the market to normal operation, which may mean higher prices or lower demand.

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