Answer to Question #210740 in Microeconomics for Rolin Simo

Question

A.   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? ( Max.500 words)

Answer 1

Price ceiling refers to price control where the government sets maximum prices that sellers should charge their products. Price ceilings said to be ineffective if it does not change the choices of market participants. Price ceilings said is inefficient because it leads to low-quality goods, extra charges to consumers, and prevents the market from adjusting to equilibrium price and quantity.

Imposing a production quota and the price ceiling will not restore efficiency because it will lead to low-quality products.

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