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?

Solutions

Expert Solution

Price control are of two types:

Price ceiling: It is effective when it is implemented at a level which is less than equilibrium level. It helps in maintaining price at a specific level and does not let it rise. At this price level, there is more demand than supply which creates shortage of good. Some consumers would be there who are willing to pay higher price than ceiling which result in creation of black market.
Price floor: It is effective when it is implemented at a level which is more than equilibrium level. It is the minimum price set by government such as minimum wage, price which farmer gets for their crops. At this price level, there is more supply than demand which creates surplus of goods in short run which will result in inventories of goods.

Even if they are not efficient, government implements those such that they can provide enough money to wage earners and they can have enough quantity of goods available with them even in case of natural calamity.

Rahul Sunny answered 1 year ago

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