Question

discuss price ceilings and price floors. They are responses by government to market failures. The text discusses rent control and minimum wage. Another application is limits often set by states, called usury laws, that limit the maximum interest rates that can be charged to borrowers. In some states, like Arkansas, this has resulted in the elimination of "pay day loans" and has shut down an industry.   Consider the results of this price ceiling. Are the economic effects worth the price?

Answer 1

(i) Price control/Price Ceiling: When government fixed price of a product at a level lower than the equilibrium price, the price is called control price or price control by the government. This is done to control the interest of the consumers. The implication or consequence of price control are as follows:

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a) Rationing: It is a system of distributing essential goods in limited quantities at control prices. It is reported when due to a shortage, a certain good is not available at reasonable price. Government establishes Public Distribution System as a tool to help the consumers.

b) Black market: Another result of price control can be an emergence of a black market in which the commodity is sold at a price higher than the government's fixed price. The reason is that on the one side, sellers are not ready to sell at a lower price fixed by the government and on the other side, some consumers are ready to offer a higher price to satisfy their demand for a commodity. A black market is that market situation in which goods are sold at prices higher than the price fixed by the government by law.

(ii) Support Price/ Price Floor: When government fixes the price of a product at a level higher than equilibrium price, it is called support price. As a result, the supply becomes in excess of demand. Support price is the minimum guaranteed price at which producers can sell their output to the government if so desired. The main consequence of support price is that consumers have to pay a higher price for the good. On the other hand, the income of the producers goes up. The aim of support price is to insulate the farmers from fluctuations in their income which are caused by price variations in the free market.