Price Controls

Question 1

What is price ceiling or setting a maximum price by the government?

Answer 1

To protect consumers from exploitation by sellers. Usually, in the case of commodities that are
necessities, the government sets a maximum price limit in the market.
The effects of a maximum price limit:
∑ As long as the market price is below or equal to the maximum price limit, it will be
ineffective and the government will not interfere in the market.
∑ If the market price tends to cross the maximum price limit, the government takes
administrative actions to make it effective.

Question 2

What are the advantages of setting a maximum price?

Answer 2

1) The consumers will be happier and it will be easier for them to purchase goods as the people will get the product at a lower price.

Question 3

What are the disadvantages of setting a maximum price

Answer 3

1) It creates a shortage and the people will now look towards the black market to get those goods.
2) The entrepreneur cant maximize profit and hence has to abide by the law
3) The quality of the materials decrease because now the producer is forced to sell at a lower price so he cuts down on cost of production using low grade raw materials for example
4) Future supply will decrease because people will think there is no profit in the business
5) Due to shortages certain groups may be favored in terms of how fast they get a product ( RELATIVES, POWERFULL BUSINESSMAN)

Question 4

What is price flooring by the government?

Answer 4

Sometimes the prices are adjusted too low to benefit the suppliers of the product, so the
government feels the need to interfere in the market by setting minimum prices—for example,
through minimum wage laws for agricultural products. The government imposes price floors in
an effort to artificially increase the prices that farmers receive.

Question 5

What are the benefits of price flooring ?

Answer 5

It benefits people who have set higher prices for goods.

Question 6

What are the disadvantages of price ceiling?

Answer 6

1) The average consumer may not be able to afford the product now
2) Sellers will only benefit if the demand is inelastic ( necessity)
3) Non-price factors will play a larger role in the rationing process, but this time buyers will
be in a position to be more selective. Buyers will purchase from sellers willing to offer
them non-price favors—better service, discounts on other products, or easier credit
terms etc.