Last month, the government announced that the ceiling price for chicken and eggs would be removed. The intention was to pave the way for market forces to determine the selling price of the two goods and move towards the implementation of more targeted subsidies.
The decision was quickly reversed, with a new ceiling price of RM9.40 per kilogram of chicken (50 sen higher than the recently removed ceiling).
To the average person, these might seem like a rather confusing string of developments. How would the removal of a price ceiling even help you? Aren’t lower prices better?
Here’s a quick recap of the ceiling prices for chicken sold in Malaysia for the last 20 years. Based on the data compiled from KPDNEP and The Star, the ceiling price for chicken has gone from RM5.40 per kg in 2001 to RM9.40 per kg in 2022.
Ceiling price of chicken over the years
|Ceiling Price (RM/kg)
|Market Price (RM/kg)
|8.9 - 9.4
|9.8 - 10.5
|7.4 - 9.5
|8 - 9
|7.4 - 8.5
|8 - 8.5
|7.5 - 10
|9.5 - 10
|7.5 - 7.7
|7.4 - 7.6
|5.99 - 7.7
|5.99 - 7.7
|6.8 - 7
|6.8 - 7
|6.8 - 7.2
|6.8 - 7.2
|6.8 - 7.2
|6 - 8
|7 - 8
|5.4 - 6.6
|5.4 - 6
|5.4 - 6
|4.8 - 5.4
|4.8 - 5.4
Source: KPDNHEP, The Star
What is a price ceiling
Simply put, a price ceiling is a mandated maximum amount that a seller is allowed to charge for a product or service. As you might already be aware, ceiling prices are usually set by law and are commonly placed on things such as staple foods to ensure that such vital products do not become unaffordable for the average consumer.
It is a form of price control that can be quite advantageous and beneficial by allowing essential or stable items to remain affordable, at least in the short term.
How it works
To understand how price ceilings work, we must use the traditional demand and supply framework. Here is how a basic supply and demand diagram looks like:
As you can see above, as prices rise, the quantity demanded for certain items will decrease. On the other hand, lower prices will increase the quantity demanded. The opposite works for supply, as higher prices will incentivise producers to supply more goods and services, while lower prices will disincentivise them. The point where supply and demand are equal is known as equilibrium. Without outside influence, supply and demand will always find a point of equilibrium.
The red line in the diagram represents a price ceiling. As you can see, the price ceiling is preventing the price of goods and services from going any higher. While at first glance, price ceilings might seem to be an obviously good thing for consumers, they do have some serious long term consequences if left unchecked.
It is true that costs go down in the short run, which can help to stimulate quantity in demand and keep money circulating within the economy. However, price ceilings can lead to a severe shortage of goods and services as producers cut back on production (or quality) to ensure that their own costs are being met.
As a result, there are many questions of how efficient price ceilings and price floors really are at protecting the most vulnerable consumers from high costs or if they are even being protected at all.
Price ceiling vs price floor
As you might already tell, a price floor is the opposite of a price ceiling. It aims to set a minimum purchase cost for a product or service. Otherwise known as “price support,” it represents the lowest legal amount at which a good or service may be sold while still functioning within the traditional supply and demand model. In other words, price floors keep the price from falling below a particular level.
Agriculture is one sector where price floors are commonly implemented to guarantee a minimum income for farmers. However, a side effect of this is that these price floors have created persistent surpluses of a wide range of agricultural products. While surplus might sound great, excessive surplus for a long period of time can be inefficient and wasteful. One such example is the massive food surplus faced by the US at the start of the pandemic, where tons of food were left to rot as it was cheaper than shipping it to places that might need it.
How is the ceiling price calculated?
While price ceilings are generally implemented to keep prices low to help consumers, governments typically calculate price ceilings in order to match the equilibrium of supply and demand as closely as possible. In other words, they try to impose control within the boundaries of what economists think that people are willing to pay. However, this doesn’t mean that it doesn’t impact the supply and demand of the product or service.
As mentioned earlier, the result is a possible shortage of goods and services or reduced quality. If we take Malaysia as an example, the price ceiling of chicken and eggs will definitely help consumers by keeping the prices stable and affordable. However, since the producers and retailers are not being compensated for this enforced pricing, they will have to find a way to make up for the cost.
They could either supply fewer chicken and eggs, or they could sell products of lower quality, which would otherwise not have been sold. Some chicken suppliers were also making up for the difference by exporting to other countries instead of selling locally. (which is what led to the export ban to Singapore).
Alternatively, they may cut back on bonuses such as bulk discounts. This will likely continue as long as the price ceiling is keeping prices from reaching the equilibrium of supply and demand.
To wrap things up, price ceilings prevent a price from rising above a certain point and are a form of price control.
While in the short run, they often benefit consumers by ensuring certain goods and services remain affordable, the long term effects of price ceilings are complex.
They can have a negative impact on producers and sometimes even the consumers they aim to help, by causing supply shortages and a decline in the quality of goods and services.