Question

A ceiling price is where the government imposes a maximum price in order to ensure prices of certain goods/services are not beyond the reach of the masses. In recent years, many have claimed that this policy is both not effective and efficient. Why is this so? Discuss

Answer 1

Price ceilings are legal maximum prices imposed by the government to keep goods affordable. However, they can lead to shortages, reduced quality, and a misallocation of resources.

Step-by-step explanation:

A price ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. However, price ceilings may not always be effective and efficient for several reasons.

Firstly, when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, resulting in a shortage. This means that some consumers may not be able to purchase the product at all, while others may have to pay higher prices in the black market. Therefore, price ceilings can lead to a misallocation of resources and reduce overall welfare.