Final answer:
When a legal ceiling price is set above the equilibrium price, it does not affect the market because sellers can still sell at the equilibrium price. Ceiling prices only impact markets if set below equilibrium, leading to shortages. The existence of a ceiling price above the equilibrium doesn’t change the actual equilibrium price.
Step-by-step explanation:
If a legal ceiling price is set above the equilibrium price, it means that the government has instituted a maximum price for a good or service that is higher than the price at which the quantity demanded by consumers equals the quantity supplied by producers. In a scenario where the ceiling price is set above equilibrium, there will be no immediate effect on the market because sellers can still sell at the equilibrium price without violating the price ceiling.
A price ceiling only becomes effective or 'binding' when it is set below the equilibrium price. This would create a situation where the demand would exceed the supply, leading to a shortage. For example, if the equilibrium price of a gallon of milk is $3 and the government sets a ceiling price of $4, producers can still sell milk at the market price of $3, which means there is no change in the market dynamics. However, if the ceiling price were set at $2, below the equilibrium price, then there would be more people willing to buy milk at the lower price than there is milk available, causing a shortage.
The actual market price can be at or below the ceiling price, but the presence of a ceiling price set above equilibrium does not alter the equilibrium price itself, as it does not interfere with the forces of supply and demand.