Price ceiling — shortage and deadweight loss
A price ceiling keeps the price below a set level. If it is under the market price, buyers want more than sellers offer, and less is traded.
Example numbers — demand P = 100 − Q, supply P = 20 + Q. Straight lines to show the mechanism, not a real market.
The ceiling is below equilibrium. At this price sellers offer 30 and buyers want 50. Only the smaller amount, 30, is traded; the orange triangle is the deadweight loss from the trades that no longer happen.
Not in this calculation
- Curved supply and demand — the example uses two straight lines
- Who gets the scarce goods — queues, rationing and other ways of sharing them out
- Supply and demand shifting over time
- A cap on what generators are paid (the SMP cap) — it does not work like a cap on consumer prices
Using the example values
A real case
In the timeline →The 2022 emergency settlement price cap on the SMP
A price ceiling below equilibrium leaves buyers wanting more than sellers offer. Korea’s power market added an SMP cap in late 2022 — but it caps what generators are paid, so it does not behave exactly like this diagram.
- Basis
- Amended Notice on the Cap on Electricity Trading Prices, MOTIE Notice No. 2022-199, in force 30 Nov 2022
- When it can apply
- When the weighted-average SMP of the last 3 months is in the top 10% of monthly weighted averages over the preceding 4–123 months (Art. 4(2))
- Cap level
- 1.5 × the weighted-average SMP of the preceding 4–123 months (Art. 4(3))
- Applies to
- All generators of 100 kW or more (Art. 4(5))
- Actually applied
- Four months — Dec 2022 (mainland 158.96, Jeju 226.56 KRW/kWh), Jan 2023 (160.23, 227.06), Feb 2023 (161.54, 227.49) and Apr 2023 (164.52, 228.90), each set by a separate notice. It did not apply in Mar 2023 (reason not verified)
- Duration
- One month at a time; the provision lapsed on 30 Nov 2023 (Addenda Art. 2)
How this differs from the textbook diagram
- A textbook price ceiling caps what consumers pay. The SMP cap limits the settlement price generators receive; retail tariffs are set separately.
- So the shortage and deadweight loss in the diagram cannot be read straight onto the power market. The case only shows that such a cap was written into the rules and applied for four months.
Not stated here: the size of its effect on generators or tariffs, and why it did not apply in March 2023 — to be added once verified.
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