Binding price ceilings have been used to protect consumers from “exorbitant” prices for many products such...

Binding price ceilings have been used to protect consumers from “exorbitant” prices for many products such as petrol and rental accommodation. In practice, however, such a policy quite often leads to making the community worse off. Use an appropriate diagram to discuss this issue. (100 words）

Solutions

Expert Solution

The binding price ceiling is the maximum price set by the government below the equilibrium price that the sellers can charge.

Binding prices indeed protect consumers from paying exorbitant prices for products like petrol and rental accommodation. But the drawback of a binding price ceiling is that it creates a deadweight loss or the loss of social welfare.

Description of the diagram:

Before binding the price ceiling, the market for petrol or rental accommodation is in equilibrium. At point E. That is, the demand for petrol is equal to the supply of petrol. Equilibrium quantity and price are q and P respectively.

So in the case of petrol and rental accommodation, the government set a maximum price below equilibrium such that all consumers are protected from exorbitant prices. (price ceiling = P_C)

But when the maximum limit (price ceiling = P_c) is set below the equilibrium price P. The demand is more than the supply. (D>S). And this creates a problem of shortage, as a result, the new quantity sold and consumed is less than the equilibrium quantity. The society ends up consuming less quantity (q^c), the consumer and producer surplus decreases, which means that the total societal welfare has decreased. And the decreased social welfare is characterized as a deadweight loss.

Consumers are worse off as they get less quantity to consume. Moreover, suppliers also are worse off as they could gain more producer surplus under a competitive market.. So, the community as a whole is worse off by the binding price ceiling.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Rent control is an example of a price ceiling. Price ceilings keep prices low for consumers....

Rent control is an example of a price ceiling. Price ceilings keep prices low for consumers. We can clearly see that sellers (landlords in this case) are worse off. Consider if there is an argument to be made that consumers are worse off, too. a) After watching the Seinfeld video clip, discuss how some consumers are made better off and some are not in a rent-control situation. b) What kinds of rationing mechanisms would develop to help allocate the few...

Price ceilings, such as rent controls, will lead to _______ if they are binding. Group of...

Price ceilings, such as rent controls, will lead to _______ if they are binding. Group of answer choices an equitable distribution of housing surpluses shortages more apartments being built

“Even though price controls fail to protect many consumers’ controls hold the promise of protecting groups...

“Even though price controls fail to protect many consumers’ controls hold the promise of protecting groups that are particularly hard-pressed to meet price economies”. 1.1. In terms of the above statement, discuss the two (2) main types of price controls that can be implemented by government in your country. Substantiate your answer with the aid of diagrams. (20) 1.2. Explain the role of the National Energy Regulatory Authority in South Africa (NERSA) in terms of prices controls. (10)

1) explain what a price ceiling is? 2)Do binding price ceilings cause shortages or surpluses? Explain...

1) explain what a price ceiling is? 2)Do binding price ceilings cause shortages or surpluses? Explain why. 3) What are at least three unintended consequences of binding Price Ceilings? Explain. 4) explain what a price floor is?

Price controls (price floors and price ceilings) are a commonly used tool on behalf of governments...

Price controls (price floors and price ceilings) are a commonly used tool on behalf of governments to intervene in the way markets are operating. Discuss whether price controls are an effective way to intervene to the market. How is the use of price controls distorting the operation of markets? Provide examples of countries that have used price controls to affect the way various markets operated. Analyze both price floors and price ceilings.

To protect a domestic industry from foreign competition by raising the price of foreign competitors’ products,...

To protect a domestic industry from foreign competition by raising the price of foreign competitors’ products, Brazil could impose foreign-exchange controls. establish an embargo. impose a nontariff barrier. levy an import tariff. set an import quota. Which of the following includes Brazil as a member? The Common Market, also called the European Union The Common Market of the Southern Cone North American Free Trade Agreement The Commonwealth of Independent States Central American Free Trade Agreement

Recall this information from the text: “Price ceilings prevent a price from rising above a certain...

Recall this information from the text: “Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often...

Many feel that companies have a social responsibility not to sell products that can be harmful to consumers.

Many feel that companies have a social responsibility not to sell products that can be harmful to consumers. For example: Should McDonald’s stop selling Big Macs because some customers do not control their diets and become obese from fast food? The same argument can be made for numerous products on the market.-Choose any product in your local market that you consider harmful to consumer.-Discuss how decision makers must adopt policies that take into account the social consequences of their business actions

• When do firms have opportunity to charge different prices to different consumers? Example from a...

• When do firms have opportunity to charge different prices to different consumers? Example from a real world situation. There are four key types of market structures in the market economy: perfect competition, monopoly, oligopoly, and monopolistic competition. Each of the market structures has its own key distinguishing features. The marketing strategies of firms also differ from market structure to market structure. 1. Pick a specific industry from one of the market structures and explain how it would function and...

If the government removes a binding price floor from a market, then the price paid by...

If the government removes a binding price floor from a market, then the price paid by buyers will increase, and the quantity sold in the market will increase. increase, and the quantity sold in the market will decrease. decrease, and the quantity sold in the market will increase. decrease, and the quantity sold in the market will decrease. Under rent control, bribery is a mechanism to bring the total price of an apartment (including the bribe) closer to the equilibrium...

Subjects