Final answer:
A price ceiling is most effective when set equal to the equilibrium price (P(ceiling) = P(equilibrium)), ensuring market efficiency and no interference. This eliminates shortages or surpluses and allows the market to operate optimally. Thus the correct option is option (C).
Step-by-step explanation:
A price ceiling is a government-imposed maximum price that can be charged for a good or service. When a price ceiling is set, it can either be above, below, or equal to the equilibrium price. The equilibrium price is the price at which the quantity demanded equals the quantity supplied in a market.
In the case of a price ceiling, if it is set above the equilibrium price, it would have no effect as the market price would naturally be lower. If it is set below the equilibrium price, it creates a shortage because suppliers are not willing to supply the quantity demanded at the lower price. This results in excess demand.
However, when a price ceiling is set equal to the equilibrium price, it does not distort the market forces. At this point, the ceiling is not binding, and the market operates freely at the equilibrium price. There is neither a surplus nor a shortage, and the market reaches an optimal balance between supply and demand.
In mathematical terms, if P(ceiling) is the price ceiling and P(equilibrium) is the equilibrium price, a price ceiling is only effective when P(ceiling) < P(equilibrium). When P(ceiling) = P(equilibrium), the market operates efficiently without any interference from the price ceiling. Thus the correct option is option (C).