Answer to Question #284356 in Macroeconomics for nasrina

Question

Suggest how the problems of price control can be resolved without having the government to intervene in the market and actions that can be taken by both consumers and producers.

Answer 1

Prices set by market forces are determined by producers based on supply and demand. Price controls, intended to promote affordability and economic stability, may have the opposite effect. Long-term price controls have been linked to shortages, rationing, decreased product quality, and the emergence of illegal markets to supply the price-controlled goods through unofficial channels. Producers may lose money if prices are too low. This often results in lower quality goods and services.

The government usually uses a price ceiling or a price floor to control market prices. A price ceiling is a legally set maximum price that producers cannot sell above. There is no set price for this ceiling. A price floor is a minimum price below which no sales are allowed.

Allocative efficiency occurs when goods and services are distributed based on consumer preferences. When marginal cost equals marginal benefit, Allocative efficiency is achieved. That is, the marginal cost at which producers are willing to supply equals the price at which consumers are willing to pay (MC=MR). Only the market demand curve intersects the market supply. The consumer and producer surpluses are maximum at market equilibrium. Price fixing reduces consumer and producer satisfaction. Overall, price controls like ceiling and floor create inefficiencies. The price floor can be below or above equilibrium. Price ceilings prevent price increases above a certain level, while price floors prevent price decreases below that level. The price ceiling is used to prevent producers from exploiting consumers. This is a consumer-friendly measure. The price floor helps producers by stabilizing their income.