What is defined as the highest permitted price for a good or service?

The highest permitted price for a good or service is referred to as a price ceiling. This economic tool is implemented by the government to prevent prices from exceeding a certain level, particularly in markets for essential goods or services, such as housing or basic food items. The intention behind a price ceiling is often to protect consumers from excessively high prices, ensuring that essential products remain affordable, especially during times of scarcity or increased demand.

For example, if a government sets a price ceiling on rental prices to make housing more affordable, landlords cannot charge more than that set price, which could help low-income tenants secure housing. However, price ceilings can lead to shortages, as they may reduce the incentive for suppliers to produce more of the good or service at the lower price.

Understanding this concept helps in evaluating market behaviors and regulatory impacts on supply and demand.