Question

1. The government is currently considering setting a maximum price (price ceiling) for basic goods to ensure that people can get access to these goods at this current time. Fully explain your answer and also use a single diagram to demonstrate the likely outcomes of this policy if the maximum price is set:

1. Below the current free market price                                              

2. Above the current free market price

3. At the current free market price      

2. The Australian government has implemented a number of microeconomic reforms over the past 40 years including deregulation of banking. Do you think banking deregulation has been beneficial or not? Explain your answer. Describe what you think may be the difficulties with microeconomic reform in Australia and highlight an area that you think currently requires microeconomic reform. Justify your answer.

Answer 1

1. A price ceiling is a maximum price limit set by the government or any other competent authority to protect the consumers from conditions that could make commodities very expensive. Price ceiling is basically set below the the market price to work effectively. Let us explore all these three situations mentioned in the question:

i. Price ceiling above the market price: In this case, there will be excess supply in the market. This is becasue at the price ceiling level, the quantitu demanded will decrease and the quantity supplied will rise. Here, the consumer surplus declines. Thus, setting price ceiling above the market price beats the very purpose of price ceiling and is not effective.

ii. Price ceiling at the market price level will clear the market. The consumer surplus and producer surplus stay the same as under unregulated market conditions. Thus, the purpose of price ceiling is defeated again as it did not alter the market in favor of consumers in any way.

iii. If the price ceiling is below the market price level, there will be excess demand. However, on the bright side, we are able to protect the consumers from higher market prices and increase the consumer surplus.

(Only 1st question with all sub parts in detail according to guidelines).