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Price Controls

Government implements price controls such as price ceilings to limit how high prices can rise for essential goods and services. Price ceilings set a maximum legal price below the equilibrium price. This keeps items affordable for low-income consumers but can also result in shortages as supply is restricted. Drawbacks of price ceilings include black markets emerging as suppliers seek higher prices, unfairness to sellers receiving lower prices, and shortages occurring as price ceilings discourage supply.

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3K views

Price Controls

Government implements price controls such as price ceilings to limit how high prices can rise for essential goods and services. Price ceilings set a maximum legal price below the equilibrium price. This keeps items affordable for low-income consumers but can also result in shortages as supply is restricted. Drawbacks of price ceilings include black markets emerging as suppliers seek higher prices, unfairness to sellers receiving lower prices, and shortages occurring as price ceilings discourage supply.

Uploaded by

apeapesaje
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Price Controls

Government acts legally limiting and controlling how high or how long a price may go.
There are two types of price control; price ceiling and price floor.

Price ceiling
A price ceiling sets the maximum legal price that a seller may charge for a product or
service. It also known as maximum price legislation and it is set below the equilibrium
price.

Rational of having price ceiling


Enable consumers to obtain some essential goods or services that they could not afford
at the equilibrium price.
Examples: Rent controls and usury laws in United States and United Kingdom
Which specify maximum prices in the forms of rents and interest rates
That can be charged to borrowers.

Price ceiling in Malaysia

Imposed on essential goods such as rice, cement and chicken. Government also
impose price ceiling either on all products or on a very wide range of product to restrain
inflation.

Figure 1(a)
In figure 1(a) assume that the rapid increase in income has lead to an increase in
the purchase of automobile and shift the demand for petrol to the right so that the
equilibrium of market price reaches RM5.00 per liter, shown as Pe in figure above. The
rapid increase in the price of petrol is a burden to consumers especially to low and
moderate income consumers. Therefore to keep petrol affordable to this households the
government imposed a price ceiling(Pc) of to RM2.00 per liter. The effect to RM2.00
ceiling price was intended to keep petrol affordable but it also resulted in excess demand
existed. The quantity of petrol demanded at Pc is Qd and the quantity supply is only Qs;
a persistent excess demand or shortage of amount Qd-Qs occurs.

Disadvantages of price ceiling

1) the rise of illegal or black market


Black market often arises to supply the commodity at the higher price than the
ceiling price. This is due to people are willing to pay at a higher price.

2) unfair to sellers who would have to receive a lower price.


This is because the lower the price is, the lower the profit for the sellers. This
may lead reduction in the quality or services provided.

3) sellers may use other practices to replace the price system.


The goal of rent control is to protect low income families from escalating rents
and to make housing affordable to poor. Problem will occur on the supply side because
price ceiling make it less attractive for landlords to rent out their properties in the rental
market.

4) reducing the selling price create a shortage of the product.


A price ceiling set below the equilibrium price will cause the quantity demanded
always exceed the quantity supplied.

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