Explain the effect of a ‘price ceiling’.

Price ceiling is the maximum legal price which the suppliers can charge for a particular good or service. If the price ceiling is set above the equilibrium price, it has no effect on price and quantity. When the price is set above the equilibrium price, there occurs an excess supply in the market and price and quantity automatically comes down to the equilibrium level. To be meaningful price ceiling has to be set below equilibrium price. In this case there occurs an excess demand in the market, which pulls up the price to the equilibrium level but the price ceiling prevents it from going up to the equilibrium level.