Answer to Question #210741 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

A price ceilings are said to be inefficient if they does not change the choices of market participants since they will prevent a market from adjusting to its equilibrium price and quantity, and thus will create an inefficient outcome. The government can restore efficiency since the price ceiling prevents the price from rising above a certain level. so it is advantageous in the short run as consumers can benefit from a lower price and an increase in consumer surplus. But in the long run When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Whereas production quotas boost domestic production by restricting foreign competition.

The buyers of the good or service subject to a price ceiling benefit from the ceiling, if they are still able to purchase the product. Sellers of a good or service subject to a price ceiling are 

hurt by the ceiling, when the workers who produce the product, and those buyers unable to purchase the product because of the shortage caused by the price ceiling.