Answer to Question #209579 in Microeconomics for Jeremy Levu

Question

Why are price ceilings said to be inefficient? Can the government restore efficiency by imposing a production quota along with the price ceiling? Who benefits and who loses from such a program? 

Answer 1

Price ceiling refers to the highest price at which goods and services can be sold. It aims at keeping essential products affordable for every citizen in the country. However, it is regarded as inefficient because it leads prevents the market from adjusting to equilibrium quantity and price. It leads to shortages if the price ceiling is below the equilibrium price, extra charges by the consumer, and lastly, it leads to lower quality goods. All these factors lead to deadweight loss to the economy.

Imposing an import quota won't solve the inefficiency sufficiently because the producers are not willing and will end up producing low-quality products. It will only be a solution in the short term and not the long term. The government should however decrease the necessary production costs such as utilities like power, water, transport, and relevant taxes or offer subsidies.

Producers are the key losers because if the price is below equilibrium price they will be forced to produce at a loss. Consumers will benefit from higher quantities at low prices.