What primary effect does a price ceiling create in a market?

A price ceiling is a government-imposed limit on how high a price can be charged for a product, typically set below the market equilibrium price. When a price ceiling is enacted, it leads to a situation where the price of a good is artificially maintained at a lower level than what would be determined by supply and demand. This reduction in price can cause several market distortions.

One primary effect of a price ceiling is a decrease in overall market efficiency. When prices are held below equilibrium, the quantity demanded exceeds the quantity supplied, leading to a shortage. This imbalance results in inefficiencies because resources are not allocated in the most effective manner. Producers may reduce their output or cease production altogether due to decreased incentives to supply goods at capped prices, which can lead to a decline in the quality of the product offered.

Furthermore, some consumers may benefit from lower prices, but others may not be able to purchase the good at all due to scarcity, creating inequities in access. In addition, the lost gains from trade that occur because transactions that could have happened at equilibrium do not take place contribute to the overall reduction in total welfare or surplus in the market. Overall, a price ceiling disrupts the natural market mechanisms that promote efficiency, making option A the correct