Which of the following is an accurate statement about the consequence of a binding price ceiling?

• A. It has no effect on the market if set above the equilibrium price.
• B. It results in a surplus because producers supply more than consumers demand at the ceiling price.
• C. It leads to a shortage because the quantity demanded exceeds the quantity supplied at the ceiling price.
• D. It causes the market price to rise above the equilibrium price.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand what a price ceiling is — it is a legal maximum price set by the government below which a good or service can be sold.
2. Step 2: Identify the equilibrium price where quantity demanded equals quantity supplied without any intervention.
3. Step 3: Recognize that a binding price ceiling is set below the equilibrium price, which means the price cannot rise to the natural market-clearing level.
4. Step 4: Analyze the effects of this binding ceiling: at the lower price, consumers want to buy more (quantity demanded increases), but producers want to supply less (quantity supplied decreases).
5. Step 5: Conclude that this mismatch between higher quantity demanded and lower quantity supplied creates a shortage in the market.