Question

Give a unique (realistic or fictional) example of the government interfering in a market to institute a price control (price ceiling or price floor). Explain the government's goal with implementing the price control. Explain who is likely to benefit and who is likely to lose, including reference to deadweight loss. What suggestion would you make instead of a price control that will help meet the government's goal with less negative impact (explain the economic impact this has in the market)?

Answer 1

Price controls Policies are government-authorized legal policies which mandate to fix minimum or maximum prices set for specified goods in the market.

The Price controls that fix or set maximum prices are called price ceilings or Maximum allowable price and with a price ceiling, the government forbids increase in price of specific goods above the maximum. Rent control is an example of a price ceiling. The purpose of rent control is to make rental units available in a cheaper rate for tenants.

While price controls that fix or set minimum prices are called price floors or minimum allowable price set above the equilibrium price. The price controls in in agricultural markets for a specific goods is an example of Price floor.

Benefits and effects

• These are usually economic means implemented by the government for direct intervention in the market in order to manage the affordability of certain goods.
• On an extremely short-term basis price controls are only effective method to set price for certain specific goods in the market.
• While on over the long term basis, price controls are not effective method that which can lead to problems in the market such as shortages of certain goods, rationing of products, inferior product quality, and creates black markets conditions.
• As a government economic measure, price controls mechanism can be implemented in the market with the best of direct intervention and intentions, but in actual practice, they often don't work and will not provide desired result.
• The sudden consequence which creates in the market when a government enacts price controls that which can lead to the creation of excess demand in the case of price ceilings, or excess supply in the case of price floors.
• Price floors mechanism like setting minimum wage which benefits consumers by ensuring reasonable pay for the work. Likely Price ceilings mechanism such as rent control which benefit tenants by preventing landlord from charging higher rents which will ensure affordable homes to tenants.