Definition of ceiling prices – When there is a limit placed on the increase of prices in a market.
In a buffer stock scheme, governments attempt to reduce price volatility. Therefore, ceiling prices may be placed for certain goods; this prevents price of food rising too rapidly.
If prices do rise and governments have stored foodstuffs in a buffer stock, they can release excess supplies onto the market, keeping the price down. Without the release of stocks into the market, ceiling prices are likely to lead to a shortage, waiting lists and black markets.
In this example, there is a maximum ceiling price of Max Price. This is lower than the market equilibrium of P1.
With the ceiling of Max price, it leads to a shortage (demand greater than supply)