Question

Draw a supply and demand graph in the market for bread. The government decides to impose a price ceiling (price below equilibrium). Illustrate and explain the effect of this price ceiling. Why do governments impose price ceilings?

Answer 1

Price control/Price Ceiling: When government fixed price of a product at a level lower than the equilibrium price, the price is called control price or price control by the government. This is done to control the interest of the consumers. The implication or consequence of price control are as follows:

a) Rationing: It is a system of distributing essential goods in limited quantities at control prices. It is reported when due to a shortage, a certain good is not available at reasonable price. Government establishes Public Distribution System as a tool to help the consumers.

b) Black market: Another result of price control can be an emergence of a black market in which the commodity is sold at a price higher than the government's fixed price. The reason is that on the one side, sellers are not ready to sell at a lower price fixed by the government and on the other side, some consumers are ready to offer a higher price to satisfy their demand for a commodity. A black market is that market situation in which goods are sold at prices higher than the price fixed by the government by law.

Price ceilings are imposed by the government to protect low-income individuals from not being able to afford important resources.