Question

Q2. Governments are frequently tempted to introduce price ceilings in markets. Use an example to explain why this is not such a good idea, at least when markets are competitive. Give some ideas as to what the government could do instead in order to help consumers in these markets.

notes :-

1- I need new answer please..

2- a word count of 400-500

2-

Answer 1

Price ceiling is a tool used by the govt which involves controlling the levels of prices whoch are more or less than the market equilibrium prices. Usually the market Ceiling is lower than market equilibrium prices . This is done in order to protect the buyers from the high market prices. It is a kind of subsidy acting for the buyers.

Disincentives of price ceiling are:

1. Shortage of supply in market due to falling prices . This causes discouragement for the producers due to low prices offered in market and causes low revenue generations.

2. The compensation for low prices are usually paid by the govt. This causes excessive burden for the govt to cover .

3. Price ceiling encorages black marketing because general price levels doesn't allow efficient return off of the production.

4. Low production can cause economy to face reduction in GDP levels and low growth rates also.

Other methods to help consumers are:

1. Increase the aggregate demand in the economy can cause the aggregate income levels to rise for consumers. This can be achieved by rising the investment in economy .

2. Reduction in tax levels can also cause rise in disposable income hence the consumers can purchase higher quantity of goods in the market.

3. By reducing the restrictions in production and relaxing the regulations , the production cost can Be reduced, giving,the producers incentive to reduce the price levels.

4. Encouraging free market operations and a perfect competition like situations can generate equitable and price friendly exchange rates in market.

5. Reducing and discouraging the monopolist controls in market can also help controlling price levels.