Question

Government intervention in market prices: Price floors and Price ceiling

a. Use model of demand and supply, explain what happens when

government; imposes price or price ceiling?

b. Discuss what the reasons are and why the government sometimes

choose prices and the consequences of price control policies.

Answer 1

a. Laws that government enacts to regulate prices are called Price controls. Price controls come in two flavors. A price ceiling keeps a price from rising above a certain level (the “ceiling”), while a price floor keeps a price from falling below a certain level (the “floor”).

b. It is usually done to protect buyers and suppliers or manage scarce resources during difficult economic times.