price celling

Question 1

define PRICE CONTROLS :

Answer 1

government-imposed restrictions on what can be charge for a good / service in the market.

used when Ep deemed undesirable by government

Question 2

define price celling

Answer 2

max legal price allowed by gov.

nothing can be bought/sold above this upper limit

Question 3

also means

Answer 3

price celling set below market equilibrium price

Question 4

what does price celling do

Answer 4

quantity exchanged is constrained by how much producers willing / able to bring into market

Question 5

equilibrium price & qty

Answer 5

force price down.
persistent shortage.
Ep down, Eq left

Question 6

Efficiency (society’s economic welfare is maximised)

Answer 6

if market is already efficient(current lvl of output maximises society’s welfare), gov interventions to market confirm will lead to loss of economic welfare. indirect taxes/subsidies/ price cellings/floors distort price signals and lead to loss of allocative efficency

Question 7

Certainty in outcome

Answer 7

Greater certainty in terms of effect on price / qty of good

Question 8

Feasility / Effect on gov budget

Answer 8

do not involve spending by the gov. more feasible for gov that are under pressure to reduce size of budget deficit

Question 9

Equity (equal sharing, exact distribution and division)

Answer 9

often for basic necessities or when gov think existing price is excessive(which could be driven by shortages among the suppliers)

aim: keep prices low (necessities) and affordable and REDUCE REGRESSIVE EFFECT (cuz large percentage of poor ppl income is used to buy necessities)

BUT it decreases the availability of the good (some ppl will not be able to get the goods cuz out of stock)

Question 10

Who bears the cost / burden??

Answer 10

WHO:
- firms that are forced to accept lower prices cuz no additional spending by gov,
- some consumers no longer can consume the good

Question 11

Other unintended consequences

Answer 11

1. allocation by alt means: first-come-first-serve basis. (u come first, u get first. u late come, no more liao)
   opp cost of the time spent queueing and waiting will be loss of output = fall in productivity. Gov can adopt a system of rationing through coupons distributed on the relevant criteria… No. of coupons = Qs.
2. quality deterioration:
   since cannot raise prices, firms cut MC by using lower-quality materials, reducing portion size, retrenching more ppl… = decreases consumer utility and loss of economic welfare. Gov can issue specific product standards but it comes at a high cost cuz need additional manpower for quality and enforcement checks
3. reduction in market supply in long run:
   if prices continues to be low, firms will want to leave for other industries that can have higher profits, exacerbating shortage