Question

Governments are frequently tempted to introduce price ceilings in markets. Use an example to explain why this is not such a good idea, at least when markets are competitive. Give some ideas as to what the government could do instead in order to help consumers in these markets. (Answer: 400 - 500 words)

Answer 1

PRICE CEILINGS: It can be defined as a situation where price is decreased by the government to make the goods and services affordable to the customer.

Why it is not a good idea?

It is not a good idea because though the customers are in profit and are able to afford the products, but the sellers are in complete loss as due to price ceiling they are unable to cover the production cost.

For eg: The cost of a normal mobile phone is 200$ but the maximum price at which it can be sold is 100$ by the retailer. Now the producer of the mobile is going to be in a huge loss as he has to cover the production cost, advertising cost, the salaries, also the commissions to the wholesalers and then the retailers , it is difficult for him to cover the entire cost so ultimately he will have to shut down his business rather than working in loss where he has to give from his pocket.

So this is not at all a good idea because it is beneficial to some but a loss for many.

WHAT GOVERNMENT SHOULD DO FOR CUSTOMERS

1.SUBSIDIES: It is a kind of money granted by the government or the public institution for the welfare of customers so that they can afford the goods easily. It would be a better option than the price cieling because here the producer will not have to suffer.

2. REDUCE TAXES: The govt can help customers by reducing the high rate of taxes to the amount which is affordable by the entire population,.

3. SCHEMES: Various schemes should be developed in order to help the customers who are below poverty life or find difficult to earn a living, employment should also be increased so that nobody has the issue of not being able to afford products.

4. LOW RATES LOAN: The customers can be offered loans on affordable rates so that they can start a business and earn a living rather than urging for help.