Question

The adviser to the state government claims that a price ceiling is a good policy, because it makes goods more affordable and hence enables more people to buy the good. This will increase economic efficiency. Which of the following is the correct response to that statement?

Group of answer choices

The adviser is correct, because poor people can now afford the good, which is fairer

The adviser is incorrect, because it fails to make goods more affordable

The adviser is incorrect, because, even though some additional people might be able to afford the good now, fewer people in total can buy the good

The adviser is correct, because it increased consumer surplus

Answer 1

The adviser to the state government claims that a price ceiling is a good policy, because it makes goods more affordable and hence enables more people to buy the good. This will increase economic efficiency. Which of the following is the correct response to that statement?

Correct answer choice:

The adviser is incorrect, because, even though some additional people might be able to afford the good now, fewer people in total can buy the good

A price ceiling sets the maximum price that buyers will have to pay for a good. Generally, this price ceiling is set below the equilibrium price. This creates a market distortion, because highest efficiency is at equilibrium. Now, at this maximum ceiling price, there will exist a mismatch between demand and supply: quantity demanded will exceed quantity supplied. Sellers will not be happy with this lower price, while buyers will be more than happy. Such a situation creates shortage of the good. Thus, actually in total, fewer people can buy the good. It also creates a deadweight loss - as now the market size becomes smaller.

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Why other options are wrong:

• because poor people can now afford the good, which is fairer - too many buyers demanding the good will only create shortage, and subsequently black markets. This will harm the interests of the poor.
• because it fails to make goods more affordable - it does make the good more affordable, but it creates a large economic inefficiency in the form of deadweight loss
• because it increased consumer surplus - it decreases consumer and producer surplus, thus decreasing total surplus