Final answer:
A price ceiling is a government-imposed maximum price on goods or services, intended to keep them affordable, but can lead to shortages when set below market equilibrium. An example is the discussion around price controls on water during Hurricane Katrina, though a ceiling was not implemented. Price ceilings are part of price control measures distinguishing from price floors, which can create surpluses.
Option 'a' is the correct.
Step-by-step explanation:
A price ceiling is a legal maximum price set by the government on what a buyer can pay for a unit of a specific good or service.
The purpose of imposing a price ceiling is to keep essential goods and services affordable to the general public, particularly during periods of crisis or extreme market conditions where prices may skyrocket. For example, during Hurricane Katrina in 2005, there was a substantial increase in the price of bottled water due to the surge in demand, which prompted discussions about the necessity of price controls. However, the government did not implement a price ceiling in this case.
When a price ceiling is set below the market equilibrium, it can lead to shortages.
This happens because at the imposed lower price, the quantity demanded by consumers exceeds the quantity that producers are willing or able to supply. This imbalance can cause long lines, rationing, and even a black market for the good or service. In contrast, a price floor is a legal minimum price, which can lead to surpluses if set above the equilibrium since the quantity supplied would be greater than the quantity demanded at that price.
In summary, a price ceiling is a tool used by governments for price control to ensure affordability and prevent producers from charging excessively high prices during times of crisis or for essential goods. However, if not managed correctly, it can lead to unintended economic consequences.