Question
What is meant by price ceiling? Explain its implications.
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Answer
Price ceiling means, fixing the price of commodity by government below the equilibrium price to benifit the consumers (when the equilibrium price is presumed to be too high so that the common buyer is unable to afford such commodities at that price). Sometimes the equilibrium price determined $(OP)$ by the independent powers of demand and supply may be very high, so that most of the consumers are unable to purchase this commodity at the prevailling prices, specially in the case of necessary commodities like wheat, sugar, rice etc.
In those cases government directly interfere in price determination and decide the price $(OP_1)$ of the commodity below the equilibrium price. This price is also known as control price. In this condition government decides the maximum limit of price. At this price level the quantity demanded is more than the quantity supplied.
The implication of Price Ceiling is as follows:
In those cases government directly interfere in price determination and decide the price $(OP_1)$ of the commodity below the equilibrium price. This price is also known as control price. In this condition government decides the maximum limit of price. At this price level the quantity demanded is more than the quantity supplied.
The implication of Price Ceiling is as follows:
- Shortage: Control price are lesser than equilibrium price, therefore sellers wants to sale less of the commodity whereas consumers wants to purchase more of the commodity, which creates the problem of shortage in market.
- Hoarding and Black Marketing: Because control price is lesser than the equilibrium price which will decrease the profit margin of sellers, therefore they will try to hoard the commodity as much as possible. Due to shortage and rationing some buyer will try to purchase more units by giving higher prices than control price, which lead to black-marketing.
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