Question

Question 4: Why some governments resort to price ceiling and price floor for some goods and services? Describe three most important disadvantages of price ceiling and price floor? In what conditions do you think that price ceiling and price floor may contribute to welfare of people?

Answer 1

Price ceiling is the legal maximum price which can charged on a product or a service. Price floor is the legal minimum price that can be charged.

For certain goods and services the supplier or the production firms will charge low or high prices to make profit or to create demand for their products. So during that scenario government impose price ceiling or price floor.

Ex: Due to hurricane the price of one litre bottle went up to certain which is more than usual price. In this case price control will benefit the customer.

In this type of situation or any other difficult condition price ceiling or price floor which are imposed by the government will help the consumer

Disadvantages of price ceiling and price floor

1) There will be decrease in the supply of good or service

2) There will be shortage of the goods and services which will effect the consumer demand and price

3) Due to lower supply and shortage people will try to get goods or services illegally which leads to increase in black Market