Answer to Question #252193 in Microeconomics for Bishop@12

Question

Zim Police warns dubious traders.
HARAREà ƒ ƒ ƒ ¢ € “Ã ƒ ƒ ƒ ¢ € œThe Zimbabwean police warned last Monday unscrupulous traders selling commodities at above the government stipulated prices that they risked being arrested if caught doing the unlawful act.
Police spokesperson Inspector, Cecilia Churu, said that police would not hesitate to arrest any retailer caught flouting the gazetted price.

The warning comes in the wake of unjustified price increases of Mealie Meal in the past two weeks by millers without the approval of the government.à ƒ ƒ ƒ ¢ €  Zambia Daily Mail, 24th July, 2003.

You are required to:

Explain, with the aid of a diagram, the effect of this form of government intervention on the price mechanism.

Answer 1

Solution:

This government intervention is known as a price ceiling.

A price ceiling is a type of price control, usually imposed by the government, that establishes the maximum amount a seller may charge for a good or service.

Price ceilings prevent prices from rising above a predetermined level. When a price ceiling is set below the equilibrium price, the quantity demanded exceeds the quantity supplied, resulting in excess demand or shortages.

 

This is depicted by the below graph: