Question

1. Price controls are often put in place because the market equilibrium may not fairly distribute goods and services. Using the concepts of efficiency, equality, and dead weight loss, explain when price controls are good/bad for society.

Answer 1

a.Price ceiling means intervention of government in market to control the price on some commodities by protecting consumers from charging high prices. This is mainly to help consumers to purchase commodities that is unattainable to them due to high prices. If price sets below the market price, the market will go to shortage ,because demand will high and supply will be less due to low price. This imbalance between supply and demand will create shortage. When shortage in market is high due to price ceiling government will ration the distribution to reduce the demand of consumers, so they can't purchase good as much as they need. It results black market. Black market leads to inequality by unequal distribution of good and services
Price ceiling reduced the economic efficiency and equality. Economic efficiency achieved only when total surplus is maximised. But price ceiling reduce producer surplus and increase consumer surplus. Thereby it creates inequality. Price ceiling creates deadweight loss by discouraging supply of goods and services and creates shortage in market. Price flooring is the intervention policy of government to control the low price charging on commodities. This policy is to prevent producers from paying less for their commodities . Then demand for commodity will be low and supply will be high due to high prices. It results surplus in market. Producers faces low demand for commodity due to high prices, but producers cant do anything on price, because price is fixed by government. Price flooring reduces the consumer surplus increase producer surplus. So it reduced the economic efficiency. Due to higher prices, consumers are unable to purchase whatever they want. It reduces the equality. Price flooring creates deadweight loss by making surplus in goods market. Goods will piles up in market. There will be lack of demand due to higher prices. It will make wastage of resources.