Answer to Question #212191 in Microeconomics for Gloria

Question

(10 marks)

1.  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)

 

1. Why are price floors said to be inefficient? Can the government restore efficiency by imposing a production quota along with the price floor? Who benefits and who loses from such a program? ( Max.500 words)

 

Answer 1

1: The price ceiling is inefficient because they prevent the market from adjusting to the equilibrium price and quantity. The government restores efficiency by imposing a production quota along with the price ceiling because this prevents the price from falling below a certain level. The price limit raises surplus, thereby restoring efficiency. The buyers benefit from lower prices as sellers suffer.

2: The price ceiling is inefficient because they prevent the market from adjusting to the equilibrium price and quantity. The government restores efficiency by imposing a production quota along with the price floor because this prevents the cost of certain goods from falling too low. The price limit raises surplus, thereby restoring efficiency. The sellers benefit if the prices are set above the equilibrium while buyers suffer from the high prices.