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A government may impose price ceilings on essential goods like food and housing to protect consumers from prohibitively high prices. While price ceilings lower costs for consumers in the short term, they can also lead to unintended consequences by reducing supply. Producers may ration their goods, decrease quality, or add extra fees in response to lower profits under price ceilings. This can result in shortages as demand exceeds the limited supply, and even black markets where goods sell above the capped price. By setting the price ceiling below the equilibrium price, the government ensures a shortage occurs as quantity supplied is less than quantity demanded.

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53 views1 page

Paper 1

A government may impose price ceilings on essential goods like food and housing to protect consumers from prohibitively high prices. While price ceilings lower costs for consumers in the short term, they can also lead to unintended consequences by reducing supply. Producers may ration their goods, decrease quality, or add extra fees in response to lower profits under price ceilings. This can result in shortages as demand exceeds the limited supply, and even black markets where goods sell above the capped price. By setting the price ceiling below the equilibrium price, the government ensures a shortage occurs as quantity supplied is less than quantity demanded.

Uploaded by

aryan mehta
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Q) Explain why a government might try to impose a price celling on goods and services such as

essential foods and housing.

Ans) A price ceiling is a government- or group-imposed price control, or limit, on how high a price is
charged for a product, commodity, or service. Governments use price ceilings to protect consumers
from conditions that could make commodities prohibitively expensive.
While price ceilings might seem to be an obviously good thing for consumers, they also carry
disadvantages. Certainly, costs go down in the short term, which can stimulate demand. However,
producers need to find some way to compensate for the price (and profit) controls. They may ration
supply, cut back on production or production quality, or charge extra for (formerly free) options and
features. this leads to waiting lists and the emergence of black markets as people try to overcome the
shortage of the good and pay well above market price.
A price celling might be used by the government to impose on essential foods and housing as these
are the basic human requirements and if the prices of important goods like these are

The price ceiling, Pc, is set by the government at a level below the equilibrium price, leading to a
shortage (excess supply), since quantity demanded, Qd is greater than quantity supplied, Qs. If the
market were free, the forces of demand and supply would force price up to Pe. However, now this
cannot happen, because the price hits the legally set price ceiling. Also the price ceiling must be
below the equilibrium price. If it were higher than the equilibrium price, the market would achieve
equilibrium, and the price ceiling would have no effect.

By imposing a price that is below the equilibrium price, a price ceiling results in a lower quantity supplied and
sold than at the equilibrium price. Where the price ceiling, Pc, corresponds to quantity Qs that firms supply,
which is less than the equilibrium quantity Qe that suppliers would supply at price Pe. In addition, the price
ceiling, Pc, gives rise to a larger quantity demanded than at the equilibrium price: the quantity consumers want
to buy at price Pc is given by Qd, which is greater than quantity Qe that they would buy at price Pe.

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