Question

What are the pros and cons of using price ceilings and price floors. Why would a government choose to use price ceilings and price floors? Why would economists argue against their use?

Answer 1

Price ceiling

Merit

• Prices cannot rise above given level. That is it fixes the maximum price of the commodity.
• This lowers the price to the consumers.

Disadvantage

• It reduces the supply.
• It creates shortage in the market.
• The shortage leads to emergence of black market hence, the consumers end up paying above the market price.

Price Floor

Advantages

• It sets the minimum price at which the product must be sold.
• It increases the price that the sellers receive. Generally it is used to help the farmers
• It encourages agriculture sector.

Disadvantages

• Consumers are required to pay higher price
• Higher tariff has to be implemented. Thus, the prices are high.
• Over supply of the goods.thus creates surplus.
• Creates social welfare loss.

Government implement price ceiling in order to regulate the price of goods and services. By imposing price ceiling the government can control the prices. For example it is used in urban areas to set the maximum rent which can be charged by the landlord. Thus, keeps the price within the reach of consumers.

Price Floor is set with an objective to support the seller. For example price floor is set for agricultural output thus it provides minimum price to the farmers. So, that they can subsist in the long run and continue supplying agricultural output.

Economist are against price ceiling as well as floor since they create shortage and surplus of goods in the economy. That is their is social welfare loss (Deadweight loss) to the society due to these price control measures.

In case of price ceiling under utilization of available resources is done. That is the sellers produce less than their capacity hence it creates inefficiency. Similarly, in case of price floor sellers produce more than the quantity demanded hence overutilization of resources. In both cases the quality of the good in question degrades. And most importantly it creates burden on the consumers and higher price makes the product unaffordable by the consumers.

Both create deadweight loss hence economist argue against the price ceiling and floor.

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