Price ceiling is defined as

• A. A maximum price set by government above the equilibrium
• B. A minimum price set by government below the equilibrium
• C. A maximum price set by government below equilibrium
• D. A minimum price set by government above the equilibrium

Answer: (C)

A price ceiling is a maximum price set by the government that binds only when it is set below the market-clearing (equilibrium) price. When the ceiling is below equilibrium, it prevents prices from rising to balance supply and demand, causing a shortage because more people want the good than producers are willing to supply at that capped price. If the ceiling is above equilibrium, it doesn't bind and the market clears at the equilibrium price. This is why the statement describing a maximum price set by the government below the equilibrium best captures the concept. (For contrast, a price floor is a minimum price, and when set above equilibrium it creates a surplus; a ceiling above equilibrium is non-binding.)