Question

4.In 301 AD, the Roman emperor Diocletian issued his “Edict on Maximum Prices,”which imposed price ceilings on various goods across the Roman empire: beef, beer,wine, shoes, lions, silk, etc. As a result, merchants either stopped producing goods, orsold goods illegally. Based on economic theory, would you expect such a result? Explain,using a diagram.

Answer 1

Price ceiling means determining maximum price that seller can charge from the customer.As shown below, it determines prices (Pc) below the equilibrim price(Pm) so that it is affordable to buyer,

Example;

We assume that the equilibrium price is $25 per unit for a certain good. If the government sets a price ceiling of $15 per unit for this good, the quantity demanded will be 3,500 units, whereas the quantity supply will be 1,500 units. In this case, there is a supply shortage equal to 2,000 units for this particular product. Consequently, some consumers will not be able to buy the quantities they want. If the government does not intervene to achieve a fair distribution of the quantity supplied (something extremely difficult in practice), the suppliers may create a black market to sell the product at an extremely higher price than both the equilibrium price and the price ceiling.

However, demand increases as prices go down and supply decreases as suppliers now get less price.(Qd> Qs) Hence there is demand-supply mismatch. It does not attain any new equilibrium also.

As demand exceeds supply black marketing will happen. It is also possible that quality of goods going down. Hence, Price ceiling will not obtain desired results. Market mechanism is better solution than artificial control over prices.