Question

Assume the market price for a 5 KG bag of rice is R80 and the government has announced that a 5KG bag of rice cannot be sold for less than R 100.
with the aid of a well labelled diagram, explain the effect the above government decision will have in the market for rice.

Answer 1

If the market price for a 5kg bag of rice is R80 and the government has announced that a 5kg bag of rice cannot be sold for less than R100, then this government decision will create a price ceiling, so the equilibrium price will rise, the quantity demanded will fall and the quantity supplied will rise, so there will be a surplus of rice and the deadweight loss will be created.