Question

4. 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

Price control is a government policy when the government sets an upper or a lower limit on the price of a product to fulfill its various goals of helping the consumers and producers.

Price controls may be of two types: A maximum price limit above which a price cant increase or a minimum limit below which it can't decrease, this is shown graphically as

Price controls are good for society when:

• A maximum price control is imposed on necessity good like food which lowers price for consumers so even poor consumers can buy it. This increases the equality in the society as all persons gets equal opportunity to buy basic needs.
• A minimum price control is imposed on some goods to help the producers to get a price on which they can survive in the market and compete from foreign competitors. This increases the efficiency of such firms and hence they grow.
• A price control is bad for society because overall there is a decrease in surplus called the dead weight loss because of the price control. This is shown in the figure as the area of the shaded triangle.
• It is also bad because it creates shortage(or surplus) in the society which also decreases the efficiency of market.
• Overall it is good for society because it is always imposed in favour of less advantaged section of the society which helps them to come up with the normal people so it brings equality.