Question

Now assume the government decides to set a price ceiling of $4 per gallon. Show and explain how this legal price affects your graph of the milk market. What objective could the government be trying to achieve by establishing such a price ceiling?

Answer 1

The price ceiling can be defined as the legal maximum price which is imposed by the government. A binding price ceiling is imposed below the market price. As it can be seen in the below diagram a price ceiling of $4 has been imposed below the market price. This has been imposed by the government for the welfare of people because the sellers of the goods sell at higher price by restricting quantity of supply by storing the goods illegally and so the supply of goods decreases and demand remains same, as a result, the market price is high and more people are not able to purchase these goods and services at market price. Therefore the welfare of the people decreases. Hence the government for increasing the welfare of people impose the price ceiling below the market price.

Therefore the government objectives are the maximize the social welfare through price ceiling.

This has been shown in the below the diagram.