From time to time governments impose price controls. Some economists have argued that price controls are...

From time to time governments impose price controls. Some economists have argued that price controls are an inefficient policy. Why then do governments implement price controls? Discuss two types of price controls that you are familiar with? Under what circumstances would these types of policy be considered an efficient/inefficient policy?[20 marks]

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Expert Solution

Price control policy is adopted by the government from time to time. The main reason government impose price control is the to make the availability of goods and services to the consumers in the time of shortage. Price control is applied to control the inflation as well . It is a situation when real GDP is more than potential GDP and to control the situation price control is applied .Moreover , it ensures a minimum income for providers of certain goods and to try to achieve a living wage.

Two types of price control policy are price floor and price ceiling

Price floor-It is a government imposed price to prevent the prices to go below. It is mainly work for agriculture. So, farmers can get true prices for their crops. For example, It is like the minimum wage which should be given to firms. If government decides wheat prices as $ 69 then is a example of price floor. It should be higher than market price.

Price ceiling - It is also decided by the government. It must be below the market price. It is beneficial for the protection of consumer interest. Price limit on rent is an example of price ceiling.

Few economists believe that price controls is not good policy because price control decrease the amount of business in the market. They are responsible for scarcity, increase in black marketing . Therefore, price control is a inefficient policy .

It is bad when price ceiling is adopted because it creates shortage and because now firms have less profit due to setting of price below the equilibrium price.

Rahul Sunny answered 2 years ago

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